Do CDS Spreads Move with Commonality in Liquidity?

We show that commonality in liquidity is priced in both the cross-section and time-series of credit default swap (CDS) premia. Protection buyers earn a statistically significant and economically important discount for bearing the risk of individual CDS illiquidity co-moving with CDS market illiquidity. The pricing of commonality in CDS liquidity is different for calm and crisis periods as we find liquidity risk to be a priced factor in CDS spreads only during the recent financial crisis. Additionally, we find evidence that liquidity seems to be more important for the pricing of CDS than fundamentals from structural models of default risk