An empirical comparison of credit spreads between the bond market and the credit default swap market
AbstractThis paper compares the pricing of credit risk in the bond market and the fast-growing credit default swap (CDS) market. The empirical findings confirm the theoretical prediction that bond spreads and CDS spreads move together in the long run. Nevertheless, in the short run this relationship does not always hold. The deviation is largely due to different responses of the two markets to changes in credit conditions. By looking into the dynamic linkages between the two spreads, I find that the CDS market often moves ahead of the bond market in price adjustment, particularly for US entities. Liquidity also matters for their role in price discovery. Surprisingly, the terms of CDS contracts and the short-sale restriction in the cash market only have a very small impact.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Bank for International Settlements in its series BIS Working Papers with number 160.
Length: 37 pages
Date of creation: Aug 2004
Date of revision:
credit spreads comparison; bond market; credit default swap market;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Patrick Houweling & Ton Vorst, 2001.
"An Empirical Comparison of Default Swap Pricing Models,"
- Houweling, P. & Vorst, A.C.F., 2002. "An Empirical Comparison of Default Swap Pricing Models," Research Paper ERS-2002-23-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
- Patrick Houweling & Ton Vorst, 2002. "An Empirical Comparison of Default Swap Pricing Models," Tinbergen Institute Discussion Papers 02-004/2, Tinbergen Institute.
- Jarrow, Robert A & Turnbull, Stuart M, 1995. " Pricing Derivatives on Financial Securities Subject to Credit Risk," Journal of Finance, American Finance Association, vol. 50(1), pages 53-85, March.
- repec:cfs:cfswop:wp200420 is not listed on IDEAS
- Clemens Kool, 2006.
"Financial Stability in European Banking: The Role of Common Factors,"
06-13, Utrecht School of Economics.
- Clemens Kool, 2006. "Financial Stability in European Banking: The Role of Common Factors," Open Economies Review, Springer, vol. 17(4), pages 525-540, December.
- Clemens J.M. Kool, 2007. "Financial Stability in European Banking: The Role of Common Factors," Money Macro and Finance (MMF) Research Group Conference 2006 101, Money Macro and Finance Research Group.
- Juan Ignacio Pena & Santiago Forte, 2006. "CREDIT SPREADS: THEORY AND EVIDENCE ABOUT THE INFORMATION CONTENT OF STOCKS, BONDS AND CDSs," Business Economics Working Papers wb063310, Universidad Carlos III, Departamento de Economía de la Empresa.
- Avino, Davide & Lazar, Emese, 2012. "Rethinking Capital Structure Arbitrage," MPRA Paper 42850, University Library of Munich, Germany.
- Stuart M. Turnbull & Jun Yang, 2008. "Default Dependence: The Equity Default Relationship," Working Papers 08-1, Bank of Canada.
- Eisenschmidt, Jens & Tapking, Jens, 2009. "Liquidity risk premia in unsecured interbank money markets," Working Paper Series 1025, European Central Bank.
- Norden, Lars & Weber, Martin, 2004. "The comovement of credit default swap, bond and stock markets: An empirical analysis," CFS Working Paper Series 2004/20, Center for Financial Studies (CFS).
- Forte, Santiago & Peña, Juan Ignacio, 2009. "Credit spreads: An empirical analysis on the informational content of stocks, bonds, and CDS," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2013-2025, November.
- Avino, Davide & Nneji, Ogonna, 2012. "Are CDS spreads predictable? An analysis of linear and non-linear forecasting models," MPRA Paper 42848, University Library of Munich, Germany.
- Avino, Davide & Lazar, Emese & Varotto, Simone, 2012. "Price Discovery of Credit Spreads in Tranquil and Crisis Periods," MPRA Paper 42847, University Library of Munich, Germany.
- Debora Revoltella & Fabio Mucci & Dubravko Mihaljek, 2010. "Properly pricing country risk: a model for pricing long-term fundamental risk applied to central and eastern European countries," Financial Theory and Practice, Institute of Public Finance, vol. 34(3), pages 219-245.
- Michael Adler & Jeong Song, 2010. "The behavior of emerging market sovereigns' credit default swap premiums and bond yield spreads," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(1), pages 31-58.
- Odermann, Alexander & Cremers, Heinz, 2013. "Komponenten und Determinanten des Credit Spreads: Empirische Untersuchung während Phasen von Marktstress," Frankfurt School - Working Paper Series 204, Frankfurt School of Finance and Management.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Timo Laurmaa).
If references are entirely missing, you can add them using this form.