The Impact of Liquidity Risk on the Prices of Swaps with Default Risk

Abstract

Liquidity risk, i.e., the likelihood that a swap can be “sold” (i.e., assigned) may affect swap prices. This article addresses the importance of liquidity risk as a factor in the valuation of swaps, which are subject to default risk. The author presents a model for pricing these swaps by incorporating a proxy for liquidity risk. Using the model, the author finds that the effects of liquidity risk may partially offset the effects of default risk.

Citation

YE, G.L. (2002), "The Impact of Liquidity Risk on the Prices of Swaps with Default Risk", Journal of Risk Finance, Vol. 3 No. 3, pp. 6-13. https://doi.org/10.1108/eb043490