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A novel approach for testing the parity relationship between CDS and credit spread

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  • Castagnetti, Carolina

Abstract

We test the CDS-credit spread arbitrage by taking into account the presence of an unobserved common factor structure driving the movement in the prices. We examine 193 European CDS-Bond basis from January 2007 to December 2009. We estimate one and two common factors for the corporate bond spreads and the CDS premia, respectively. We address the issue of cross-member cointegration by adopting a novel approach. While standard cointegration techniques support the parity relation, the novel approach discards this hypothesis.

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  • Castagnetti, Carolina, 2018. "A novel approach for testing the parity relationship between CDS and credit spread," Economics Letters, Elsevier, vol. 172(C), pages 115-117.
    • Handle: RePEc:eee:ecolet:v:172:y:2018:i:c:p:115-117
    DOI: 10.1016/j.econlet.2018.08.023
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    Cited by:

    1. Bratis, Theodoros & Laopodis, Nikiforos T. & Kouretas, Georgios P., 2020. "Systemic risk and financial stability dynamics during the Eurozone debt crisis," Journal of Financial Stability, Elsevier, vol. 47(C).
    2. Feng, Qianqian & Sun, Xiaolei & Liu, Chang & Li, Jianping, 2021. "Spillovers between sovereign CDS and exchange rate markets: The role of market fear," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).

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    More about this item

    Keywords

    Factor error structure; Cross-section dependence; Credit default swaps; Limit of arbitrage;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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