The authors theoretically analyze the efficiency of liquidity flows in stabilizing distressed markets. Their analysis focuses on the incentives for financial institutions; specifically, they focus on arbitrage profit as an incentive and liquidity risk as a disincentive. The authors show that...

This study investigates the number of state variables needed for CDS pricing by conducting a principal component analysis using CDS data for the 2006-2009 period. Two state variables, approximated by the first two components, are found sufficient for pricing CDS spreads. The first component...