Вы находитесь на странице: 1из 1

Liquidity Measures Methodology

This document summarises the single-name CDS Liquidity model used to calculate
the liquidity score

The Liquidity Model


Fitch receives daily CDS mid- and bid-ask quotes from its contributors on a large number of reference entities. The liquidity model
takes this information, along with the number of contributors reporting on each reference entity, to generate a liquidity score for
each reference entity using the market-standard contract for each name. That is, for each name we choose the most liquid credit
point defined by a [Currency, Restructuring, Seniority=Senior, Maturity=5Y] combination and associate a liquidity score with it.

The liquidity of a contract is influenced by several factors, including the number of market participants, the staleness of quotes,
the bid-ask spread levels and the dispersion of mid‑quotes across brokers. The statistical model developed by Fitch Solutions thus
takes an integrated approach. It identifies and includes several variables that significantly influence the market’s view of liquidity.
The liquidity score it produces for each reference entity can be thought of as a composite score based on several factors.

A summarised view of the liquidity score is as follows:

(1) Liquidity Score = Function [ Inactivity On Name, Bid-Ask Spread, Spread-Dispersion ]

The left hand side (LHS) of the equation produces a measure that serves as a proxy for liquidity on that CDS reference entity.
The right hand side (RHS) lists the key liquidity predictors (Inactivity On a Name, Bid-Ask Spread on that name (suitably scaled)
and Spread-Dispersion). The right hand side variables are updated on each business date. This generates a fresh liquidity score
which is reported through our service. The function on the right hand side requires, in addition to the liquidity predictors, a set
of parameter values associated with these predictors. The set of parameters are estimated using advanced regression techniques.
Although not explicitly shown in equation (1), the statistical model also controls for default risk and as such it outputs a pure
liquidity score which is net of the default risk of the reference entity.

Transformations and additional market-level indicators


Model calibration shows that in general an inverse relationship exists between the three key predictors and the market’s perception
of liquidity. For example, as bid-ask spreads widen, the liquidity score on the LHS of (1) typically drops. This is intuitive. Since
bid-offer spreads (and indeed all the predictors) are positive variables this has the unpleasant consequence that the composite
score obtained in the LHS of equation (1) is always negative. To mirror the final score in the positive domain, the RHS of equation
(1) is multiplied by -1.

Market Liquidity score


Additionally, the modelling framework is deployed to produce a so-called Market Liquidity score. This is computed as the
arithmetic average of the liquidity score obtained in equation (1) above, with the average taken at each point in time across all
names in the global CDS market:

[Market Liquidity score]t := Mean of Liquidity scores generated from equation (1)on date t.

Regional market liquidity scores can also be computed by averaging liquidity scores across names only in specific regions. For
example, one can obtain Market Liquidity scores for Europe, a Market Liquidity score for North America.
1108CDS/LMM

www.fitchsolutions.com

Вам также может понравиться