This thesis focuses on the different liquidity issues specific to the sovereign Credit Default
Swap (CDS) market. As a first step, we present an empirical study of the pricing effect of liquidity and systematic liquidity risk in the sovereign CDS spreads. We do find a large evidence that the risk premium priced above the sovereign default risk is
mainly driven by both bond and CDS liquidity risk, which implies that liquidity plays
an important role in CDS spread movements. Secondly, we use a factor model in order
to decompose sovereign CDS spreads into default risk, liquidity and correlation components.
The main objective is to measure the weight of liquidity in the CDS spreads
not by using liquidity proxies such as bid-ask spreads or volumes but by calibrating
the model to the data. Our analysis reveals that sovereign CDS spreads are highly
driven by liquidity (55.6% of default risk and 44.32% of liquidity) and that sovereign
bond spreads are less subject to liquidity frictions and therefore could represent a better
proxy for sovereign default risk (73% of default risk and 26.86% of liquidity). Our
empirical results advance the idea that the increase in the CDS spreads observed during
the crisis period was mainly due to a surge in liquidity rather than to an increase in
the default intensity. Finally, we focus on the dynamic properties of the risk neutral
liquidity risk premium embedded in the term structure of sovereign CDS spreads. We
show that liquidity risk has a non-trivial role and participates directly to the variation
over time of the term structure of sovereign CDS spreads. Our results show that CDS
buyers earned a liquidity premium only during the pre-crisis period.