Working Paper: NBER ID: w16590
Authors: Sergio Mayordomo; Juan Ignacio Peña; Eduardo S. Schwartz
Abstract: The presence of different prices in different databases for the same securities can impair the comparability of research efforts and seriously damage the management decisions based upon such research. In this study we compare the six major sources of corporate Credit Default Swap prices: GFI, Fenics, Reuters EOD, CMA, Markit and JP Morgan, using the most liquid single name 5-year CDS of the components of the leading market indexes, iTraxx (European firms) and CDX (US firms) for the period from 2004 to 2010. We find systematic differences between the data sets implying that deviations from the common trend among prices in the different databases are not purely random but are explained by idiosyncratic factors as well as liquidity, global risk and other trading factors. The lower is the amount of transaction prices available the higher is the deviation among databases. Our results suggest that the CMA database quotes lead the price discovery process in comparison with the quotes provided by other databases. Several robustness tests confirm these results.
Keywords: Credit Default Swaps; Price Discovery; Market Liquidity; Data Consistency
JEL Codes: F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Systematic differences among CDS prices from different databases (G19) | Deviations explained by idiosyncratic factors, liquidity, and global risk (F65) |
| Lower amount of transaction prices available (G19) | Higher deviation among databases (C46) |
| Market liquidity (G19) | Volatility of quoted prices (G19) |
| Presence of transaction prices (P22) | Reduces deviations among databases (C59) |
| Higher VIX index (C58) | Larger deviations among prices (E30) |
| CMA database (Y10) | Price discovery process in other databases (D47) |