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The chicken or the egg? A note on the dynamic interrelation between government bond spreads and credit default swaps

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  • Delis, Manthos D
  • Mylonidis, Nikolaos

Abstract

This note provides the first empirical assessment of the dynamic interrelation between government bond spreads and their associated credit default swaps (CDS). We use data for the Southern European countries (Greece, Italy, Portugal and Spain) that found themselves with a problematic public sector in the dawn of the recent financial distress. We find that CDS prices Granger-cause government bond spreads after the eruption of the 2007 subprime crisis. Feedback causality is detected during periods of financial and economic turmoil, thereby indicating that high risk aversion tends to perplex the transmission mechanism between CDS prices and government bond spreads.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 25270.

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Date of creation: 20 Sep 2010
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Handle: RePEc:pra:mprapa:25270

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Keywords: Government bonds; Credit default swaps; Rolling Granger-causality tests;

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Cited by:
  1. Arce, Oscar & Mayordomo, Sergio & Peña, Juan Ignacio, 2013. "Credit-risk valuation in the sovereign CDS and bonds markets: Evidence from the euro area crisis," Journal of International Money and Finance, Elsevier, Elsevier, vol. 35(C), pages 124-145.
  2. 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.
  3. Groba, Jonatan & Lafuente, Juan A. & Serrano, Pedro, 2013. "The impact of distressed economies on the EU sovereign market," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(7), pages 2520-2532.
  4. Stolbov, Mikhail, 2014. "The causal linkages between sovereign CDS prices for the BRICS and major European economies," Economics Discussion Papers 2014-9, Kiel Institute for the World Economy.

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