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