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An empirical analysis of the dynamic relationship between investment-grade bonds and credit default swaps

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  • Roberto Blanco
  • Simon Brennan
  • Ian W Marsh

Abstract

In this paper the behaviour of credit default swaps (CDS) are analysed for a sample of firms and support found for the theoretical equivalence of CDS prices and credit spreads. When this is violated, the CDS price can be viewed as an upper bound on the price of credit risk, while the spread provides a lower bound. It is shown that the CDS market is the main forum for credit risk price discovery and that CDS prices are better integrated with firm-specific variables in the short run. Both markets equally reflect these factors in the long run, and this is primarily brought about by bond market adjustment.

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File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2004/WP211.pdf
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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 211.

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Date of creation: Feb 2004
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Handle: RePEc:boe:boeewp:211

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