Lars Norden (Department of Banking and Finance, University of Mannheim, L 5.2, 68131 Mannheim, Germany) Martin Weber () (Department of Banking and Finance, University of Mannheim, L 5.2, 68131 Mannheim, Germany and Centre for Economic Policy Research (CEPR), London, United Kingdom)
Abstract
This paper analyzes the empirical relationship between credit default swap, bond and stock markets during the period 2000-2002. Focusing on the intertemporal comovement, we examine weekly and daily lead-lag relationships in a vector autoregressive model and the adjustment between markets caused by cointegration. First, we find that stock returns lead CDS and bond spread changes. Second, CDS spread changes Granger cause bond spread changes for a higher number of firms than vice versa. Third, the CDS market is significantly more sensitive to the stock market than the bond market and the magnitude of this sensitivity increases when credit quality becomes worse. Finally, the CDS market plays a more important role for price discovery than the corporate bond market.
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Paper provided by Center for Financial Studies in its series CFS Working Paper Series with number
2004/20.
Length: 46 pages Date of creation: 20 Jan 2004 Date of revision: Handle: RePEc:cfs:cfswop:wp200420
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References listed on IDEAS 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.:
Houweling, P. & Vorst, A.C.F., 2002.
"An Empirical Comparison of Default Swap Pricing Models,"
Research Paper
ERS-2002-23-F&A Revision_, 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.
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