They therefore provide us with new, and in many cases more precise, measures of credit risk. These measures in turn can sharpen our measures of the pricing puzzles.
In addition, because the CDS market helps us to strip out the credit-risk component from bond prices, that market also gives us a clearer picture of how important non-credit-risk components of bond prices, such as liquidity, are priced. The second example involves the pricing of default correlation. Default correlation measures the tendency of firms to default at the same time.