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How Does Sovereign Bond Market Integration Relate to Fundamentals and CDS Spreads?

Author

Listed:
  • Ines Chaieb

    (University of Geneva and Swiss Finance Institute)

  • Vihang R. Errunza

    (McGill University)

  • Rajna Gibson

    (University of Geneva and Swiss Finance Institute)

Abstract

We observe significant heterogeneity across countries and maturities in the degree and dynamics of sovereign bond market integration. We analyze the role of credit quality, political and inflation risks, liquidity and investor sentiment in integrating developed and emerging bond markets and show that political risk and credit quality are the dominant factors. Bond market integration is significantly negatively related to sovereign CDS spreads. A one percent increase in integration corresponds to an average decrease in the cost of funding of about 3% of the average observed 5-year CDS spreads across all developed bond markets.

Suggested Citation

  • Ines Chaieb & Vihang R. Errunza & Rajna Gibson, 2016. "How Does Sovereign Bond Market Integration Relate to Fundamentals and CDS Spreads?," Swiss Finance Institute Research Paper Series 16-52, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1652
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    More about this item

    Keywords

    credit quality; CDS spreads; funding cost; liquidity; macroeconomic risk; market integration; political risk; sovereign bond markets;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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