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Price discovery in the markets for credit risk: a Markov switching approach

Author

Listed:
  • Dimpfl Thomas
  • Peter Franziska J.

    (University of Tübingen, Department of Statistics, Econometrics, and Empirical Economics, Mohlstr. 36, 72074 Tübingen, Germany)

Abstract

We examine price discovery in the Credit Default Swap and corporate bond market. Using a Markov switching framework enables us to analyze the dynamic behavior of the information shares during tranquil and crisis periods. The results show that price discovery takes place mostly on the CDS market. The importance of the CDS market even increases during the more volatile crisis periods. According to a cross sectional analysis liquidity is the main determinant of a market’s contribution to price discovery. During the crisis period, however, we also find a positive link between leverage and CDS market information shares. Overall the results indicate that price discovery measures and their determinants change during tranquil and crisis periods, which emphasizes the importance of more flexible frameworks, such as Markov switching models.

Suggested Citation

  • Dimpfl Thomas & Peter Franziska J., 2016. "Price discovery in the markets for credit risk: a Markov switching approach," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 20(3), pages 233-249, June.
    • Handle: RePEc:bpj:sndecm:v:20:y:2016:i:3:p:233-249:n:5
    DOI: 10.1515/snde-2015-0032
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    References listed on IDEAS

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    2. Kuck, Konstantin & Schweikert, Karsten, 2023. "Price discovery in equity markets: A state-dependent analysis of spot and futures markets," Journal of Banking & Finance, Elsevier, vol. 149(C).

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    More about this item

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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