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Time-varying price discovery in sovereign credit markets

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  • Guidolin, Massimo
  • Pedio, Manuela
  • Tosi, Alessandra

Abstract

We analyze time-variation of the price discovery process in sovereign debt markets. We test whether the cointegrating relationship that should tie bond and CDS spreads together holds. In addition, we investigate which (if any) of the two markets leads price discovery in a number of sub-samples. We focus on ten Eurozone countries, the UK, and the US. While for all the peripheral countries but Greece CDS and bond spreads show a long-run equilibrium relationship, this is not the case for core European countries, the UK, and the US. When cointegration fails to hold, none of the markets leads price discovery.

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  • Guidolin, Massimo & Pedio, Manuela & Tosi, Alessandra, 2021. "Time-varying price discovery in sovereign credit markets," Finance Research Letters, Elsevier, vol. 38(C).
    • Handle: RePEc:eee:finlet:v:38:y:2021:i:c:s1544612319307640
    DOI: 10.1016/j.frl.2019.101388
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    Cited by:

    1. Sebastiano Michele Zema, 2023. "A non-Normal framework for price discovery: The independent component based information shares measure," LEM Papers Series 2023/03, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    2. Zubair Ali Raja & William J. Procasky & Renee Oyotode-Adebile, 2020. "The Relative Role of Sovereign CDS and Bond Markets in Efficiently Pricing Emerging Market Sovereign Credit Risk," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 19(3), pages 296-325, December.
    3. Papavassiliou, Vassilios G. & Kinateder, Harald, 2021. "Information shares and market quality before and during the European sovereign debt crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    4. Zema, Sebastiano Michele, 2022. "Directed acyclic graph based information shares for price discovery," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).

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    More about this item

    Keywords

    Treasury bond spreads; Credit default swaps; Sovereign credit risk; Vector error correction models; Price discovery;
    All these keywords.

    JEL classification:

    • 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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