IDEAS home Printed from https://ideas.repec.org/p/zbw/cfswop/200420.html
   My bibliography  Save this paper

The comovement of credit default swap, bond and stock markets: An empirical analysis

Author

Listed:
  • Norden, Lars
  • Weber, Martin

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.

Suggested Citation

  • Norden, Lars & Weber, Martin, 2004. "The comovement of credit default swap, bond and stock markets: An empirical analysis," CFS Working Paper Series 2004/20, Center for Financial Studies (CFS).
    • Handle: RePEc:zbw:cfswop:200420
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/25413/1/482907959.PDF
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    2. Didier Cossin & Tomas Hricko & Daniel Aunon-Nerin & Zhijiang Huang, 2002. "Exploring for the Determinants of Credit Risk in Credit Default Swap Transaction Data: Is Fixed-Income Markets’ Information Suffcient to Evaluate Credit Risk?," FAME Research Paper Series rp65, International Center for Financial Asset Management and Engineering.
    3. Edith S. Hotchkiss & Tavy Ronen, 2002. "The Informational Efficiency of the Corporate Bond Market: An Intraday Analysis," Review of Financial Studies, Society for Financial Studies, vol. 15(5), pages 1325-1354.
    4. Francis A. Longstaff & Sanjay Mithal & Eric Neis, 2005. "Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit Default Swap Market," Journal of Finance, American Finance Association, vol. 60(5), pages 2213-2253, October.
    5. Patrick Houweling & Ton Vorst, 2001. "An Empirical Comparison of Default Swap Pricing Models," Finance 0112003, University Library of Munich, Germany.
    6. Gonzalo, Jesus & Granger, Clive W J, 1995. "Estimation of Common Long-Memory Components in Cointegrated Systems," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(1), pages 27-35, January.
    7. Blume, Marshall E & Keim, Donald B & Patel, Sandeep A, 1991. "Returns and Volatility of Low-Grade Bonds: 1977-1989," Journal of Finance, American Finance Association, vol. 46(1), pages 49-74, March.
    8. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    9. Gordon J. Alexander & Amy K. Edwards & Michael G. Ferri, 2000. "What Does Nasdaq's High Yield Bond Market Reveal about Bondholder-Shareholder Conflict?," Financial Management, Financial Management Association, vol. 29(1), Spring.
    10. Norden, Lars & Weber, Martin, 2004. "Informational efficiency of credit default swap and stock markets: The impact of credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2813-2843, November.
    11. Kwan, Simon H., 1996. "Firm-specific information and the correlation between individual stocks and bonds," Journal of Financial Economics, Elsevier, vol. 40(1), pages 63-80, January.
    12. 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 211, Bank of England.
    13. James H. Stock & Mark W. Watson, 2001. "Vector Autoregressions," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 101-115, Fall.
    14. Bank for International Settlements, 2003. "Credit risk transfer," CGFS Papers, Bank for International Settlements, number 20, december.
    15. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    16. Haibin Zhu, 2004. "An empirical comparison of credit spreads between the bond market and the credit default swap market," BIS Working Papers 160, Bank for International Settlements.
    17. Cornell, Bradford & Green, Kevin, 1991. "The Investment Performance of Low-Grade Bond Funds," Journal of Finance, American Finance Association, vol. 46(1), pages 29-48, March.
    18. Pierre Collin-Dufresn & Robert S. Goldstein & J. Spencer Martin, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lars Norden & Martin Weber, 2009. "The Co†movement of Credit Default Swap, Bond and Stock Markets: an Empirical Analysis," European Financial Management, European Financial Management Association, vol. 15(3), pages 529-562, June.
    2. da Silva, Paulo Pereira & Rebelo, Paulo Tomaz & Afonso, Cristina, 2014. "Tail dependence of financial stocks and CDS markets: Evidence using copula methods and simulation-based inference," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 8, pages 1-27.
    3. Kalimipalli, Madhu & Nayak, Subhankar & Perez, M. Fabricio, 2013. "Dynamic effects of idiosyncratic volatility and liquidity on corporate bond spreads," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2969-2990.
    4. Clemens Kool, 2006. "Financial Stability in European Banking: The Role of Common Factors," Open Economies Review, Springer, vol. 17(4), pages 525-540, December.
    5. Bhanot, Karan, 2005. "What causes mean reversion in corporate bond index spreads? The impact of survival," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1385-1403, June.
    6. Wahyudi, Imam & Robbi, Abdu, 2009. "Exploring Determinant Factors of Bond Trading with Inventory Management Theory (Case Study of Indonesian Capital Market, January – March 2009)," MPRA Paper 59883, University Library of Munich, Germany, revised 16 Jul 2010.
    7. Shahzad, Syed Jawad Hussain & Nor, Safwan Mohd & Hammoudeh, Shawkat & Shahbaz, Muhammad, 2017. "Directional and bidirectional causality between U.S. industry credit and stock markets and their determinants," International Review of Economics & Finance, Elsevier, vol. 47(C), pages 46-61.
    8. Paulo Pereira Da Silva, 2014. "Sovereign Credit Risk and Stock Markets–Does the Markets’ Dependency Increase with Financial Distress?," IJFS, MDPI, vol. 2(1), pages 1-23, March.
    9. Becchetti, Leonardo & Carpentieri, Andrea & Hasan, Iftekhar, 2009. "The determinants of option-adjusted delta credit spreads : a comparative analysis of the United States, the United Kingdom and the euro area," Research Discussion Papers 34/2009, Bank of Finland.
    10. 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 211, Bank of England.
    11. Sergio Mayordomo & Juan Ignacio Peña & Eduardo S. Schwartz, 2014. "Are All Credit Default Swap Databases Equal?," European Financial Management, European Financial Management Association, vol. 20(4), pages 677-713, September.
    12. Becchetti, Leonardo & Carpentieri, Andrea & Hasan, Iftekhar, 2009. "The determinants of option-adjusted delta credit spreads: a comparative analysis of the United States, the United Kingdom and the euro area," Bank of Finland Research Discussion Papers 34/2009, Bank of Finland.
    13. Tolikas, Konstantinos, 2016. "The relative informational efficiency of corporate retail bonds: Evidence from the London Stock Exchange," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 191-201.
    14. Peña, Juan Ignacio & Forte, Santiago, 2006. "Credit spreads: theory and evidence about the information content of stocks, bonds and cdss," DEE - Working Papers. Business Economics. WB wb063310, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    15. Forte, Santiago & Peña, Juan Ignacio, 2009. "Credit spreads: An empirical analysis on the informational content of stocks, bonds, and CDS," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2013-2025, November.
    16. Antonio Di Cesare & Giovanni Guazzarotti, 2010. "An analysis of the determinants of credit default swap spread changes before and during the subprime financial turmoil," Temi di discussione (Economic working papers) 749, Bank of Italy, Economic Research and International Relations Area.
    17. Leonardo Becchetti & Andrea Carpentieri & Iftekhar Hasan, 2012. "Option†Adjusted Delta Credit Spreads: a Cross†Country Analysis," European Financial Management, European Financial Management Association, vol. 18(2), pages 183-217, March.
    18. Calice, Giovanni & Ioannidis, Christos, 2012. "An empirical analysis of the impact of the credit default swap index market on large complex financial institutions," International Review of Financial Analysis, Elsevier, vol. 25(C), pages 117-130.
    19. Alessandro Carboni, 2011. "The sovereign credit default swap market: price discovery, volumes and links with banks' risk premia," Temi di discussione (Economic working papers) 821, Bank of Italy, Economic Research and International Relations Area.
    20. repec:zbw:bofrdp:2009_034 is not listed on IDEAS
    21. Santiago Forte & Lidija Lovreta, 2015. "Time†Varying Credit Risk Discovery in the Stock and CDS Markets: Evidence from Quiet and Crisis Times," European Financial Management, European Financial Management Association, vol. 21(3), pages 430-461, June.

    More about this item

    Keywords

    Credit risk; Credit spreads; Credit derivatives; Lead-lag relationship;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:cfswop:200420. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/ifkcfde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.