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Equity Prices, Credit Default Swaps, and Bond Spreads in Emerging Markets

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  • Jorge A. Chan-Lau
  • Yoon Sook Kim

Abstract

This paper examines equilibrium price relationships and price discovery between credit defaul swap (CDS), bond, and equity markets for emerging market sovereign issuers. Findings suggest that CDS and bond spreads converge despite various pressures that arise in the market. In most countries, however, we do not find any equilibrium price relationship between the bond and CDS markets and the equity markets. As for price discovery, our results are mixed. This stands in contrast to the empirical findings on corporate issuers in the United States and Europe.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/27.

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Length: 31
Date of creation: 01 Feb 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/27

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Keywords: Emerging markets; Stock markets; Bonds; Economic models; bond; bond spreads; cointegration; credit derivatives; equity markets; equation; statistics; bond market; bond markets; correlation; granger causality; derivatives market; hedge; hedge funds; financial markets; bond prices; bondholders; econometrics; equity market; survey; emerging market bond; bond spread; derivatives markets; market bond; sovereign bonds; vector autoregression; bond index; financial institutions; equations; hedging; probability; correlations; financial stability; liquid bond markets; international capital; financial contracts; causation; international financial markets; covariance; normal distribution; bond issuer; corporate bond; constant variance; derivative; nonlinear relationship; corporate bonds; hypothesis testing; derivative protection; financial instruments; bond yields; international capital markets; coupon bond; portfolio of bonds; regression equation; stock prices; credit derivative; cash flows; derivatives market activity;

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  1. Gonzalo, Jesus & Granger, Clive W J, 1995. "Estimation of Common Long-Memory Components in Cointegrated Systems," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 13(1), pages 27-35, January.
  2. Roberto Blanco & Simon Brennan & Ian W Marsh, 2004. "An empirical analysis of the dynamic relationship between investment-grade bonds and credit default swaps," Bank of England working papers, Bank of England 211, Bank of England.
  3. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, Econometric Society, vol. 37(3), pages 424-38, July.
  4. Hamao, Yasushi & Masulis, Ronald W & Ng, Victor, 1990. "Correlations in Price Changes and Volatility across International Stock Markets," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 3(2), pages 281-307.
  5. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, American Finance Association, vol. 29(2), pages 449-70, May.
  6. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, Econometric Society, vol. 59(6), pages 1551-80, November.
  7. Booth, G. Geoffrey & Martikainen, Teppo & Tse, Yiuman, 1997. "Price and volatility spillovers in Scandinavian stock markets," Journal of Banking & Finance, Elsevier, Elsevier, vol. 21(6), pages 811-823, June.
  8. Lehmann, Bruce N., 2002. "Some desiderata for the measurement of price discovery across markets," Journal of Financial Markets, Elsevier, Elsevier, vol. 5(3), pages 259-276, July.
  9. Baillie, Richard T. & Geoffrey Booth, G. & Tse, Yiuman & Zabotina, Tatyana, 2002. "Price discovery and common factor models," Journal of Financial Markets, Elsevier, Elsevier, vol. 5(3), pages 309-321, July.
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Citations

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Cited by:
  1. Neziri, Hekuran, 2008. "Can Credit Default Swaps Predict Financial Crises: An Empirical Test on Emerging Markets," MPRA Paper 13096, University Library of Munich, Germany.
  2. Ansgar Belke & Christian Gokus, 2011. "Volatility Patterns of CDS, Bond and Stock Markets Before and During the Financial Crisis – Evidence from Major Financial Institutions," Ruhr Economic Papers, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen 0243, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  3. John Ammer & Fang Cai, 2007. "Sovereign CDS and bond pricing dynamics in emerging markets: does the cheapest-to-deliver option matter?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 912, Board of Governors of the Federal Reserve System (U.S.).
  4. Ammer, John & Cai, Fang, 2011. "Sovereign CDS and bond pricing dynamics in emerging markets: Does the cheapest-to-deliver option matter?," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 21(3), pages 369-387, July.
  5. Jorge A. Chan-Lau, 2006. "Is Systematic Default Risk Priced in Equity Returns? A Cross-Sectional Analysis Using Credit Derivatives Prices," IMF Working Papers 06/148, International Monetary Fund.
  6. Enrique Alberola & Luis Molina & Pedro del Río, 2012. "Boom-bust cycles, imbalances and discipline in Europe," Banco de Espa�a Working Papers 1220, Banco de Espa�a.
  7. Patrick Augustin, 2012. "Sovereign Credit Default Swap Premia," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 12-10, New York University, Leonard N. Stern School of Business, Department of Economics.
  8. Jorge A. Chan-Lau & Toni Gravelle, 2005. "The End," IMF Working Papers 05/231, International Monetary Fund.
  9. Riedel, Christoph & Thuraisamy, Kannan S. & Wagner, Niklas, 2013. "Credit cycle dependent spread determinants in emerging sovereign debt markets," Emerging Markets Review, Elsevier, Elsevier, vol. 17(C), pages 209-223.
  10. Alessandro Carboni, 2011. "The sovereign credit default swap market: price discovery, volumes and links with banks' risk premia," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 821, Bank of Italy, Economic Research and International Relations Area.
  11. Jorge A. Chan-Lau, 2006. "Market-Based Estimation of Default Probabilities and its Application to Financial Market Surveillance," IMF Working Papers 06/104, International Monetary Fund.
  12. Edda Zoli, 2005. "How does fiscal policy affect monetary policy in emerging market countries?," BIS Working Papers 174, Bank for International Settlements.
  13. Bernardo León & Andrés Mora, 2011. "CDS: relación con índices accionarios y medida de riesgo," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, BANCO DE LA REPÚBLICA - ESPE.

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