Abstract
This paper examines the effects of public news releases on the market liquidity in one of the most important OTC derivatives markets — the CDS market. We document that, at the time of news releases, the bid-ask spread is wider, the number of quotes is larger, and the number of dealers is greater. Earnings announcements have particularly strong effects on liquidity while news related to credit ratings has no significant effects. Moreover, the bid-ask spread only increases on news release days and reverts to normal levels several days after news releases. Finally, the effect of news on liquidity is stronger for negative, fundamental, and unscheduled news, and is more pronounced among firms with higher information asymmetry. Our findings are consistent with models of rational trade in Kim and Verrecchia (1994).
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