The Interactions Between the Credit Default Swap and the Bond Markets in Financial Turmoil
AbstractWe analyse the links between credit default swap (CDS) and bond spreads and try to determine which one is the leading market in the price discovery process. To do that, we construct a sample of CDS premia and bonds spreads on a generic 5-year bond, for 17 financials and 18 sovereigns. First, we run VECM estimations, showing that the CDS market has a lead over the bond market over the whole sample. A decomposition of the sample shows that this result holds for financials as well as for the high-yield emerging sovereigns. However, the bond market still drives the CDS market for the sovereigns in the core of the euro area. Second, we check for non-linearities in the adjustment process during the current crisis. Results show that the CDS market's lead has been amplified by the crisis for financial institutions.
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Bibliographic InfoPaper provided by CEPII research center in its series Working Papers with number 2011-02.
Date of creation: Feb 2011
Date of revision:
Financial crisis; Credit default swaps; Bonds; Price discovery process;
Other versions of this item:
- Virginie Coudert & Mathieu Gex, 2013. "The Interactions between the Credit Default Swap and the Bond Markets in Financial Turmoil," Review of International Economics, Wiley Blackwell, vol. 21(3), pages 492-505, 08.
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G01 - Financial Economics - - General - - - Financial Crises
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- Zlatuse Komarkova & Jitka Lesanovska & Lubos Komarek, 2013. "Analysis of Sovereign Risk Market Indicators: The Case of the Czech Republic," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 63(1), pages 5-24, March.
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- Patrick Augustin, 2012. "Sovereign Credit Default Swap Premia," Working Papers 12-10, New York University, Leonard N. Stern School of Business, Department of Economics.
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