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An empirical analysis of the dynamic relationship between investment grade bonds and credit default swaps

Author

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  • Roberto Blanco

    (Banco de España)

  • Simon Brennan

    (Bank of England)

  • Ian W. Marsh

    (Bank of England)

Abstract

This paper analyses the behaviour of credit default swaps (CDS) for a sample of firms and finds support for the theoretical equivalence of CDS prices and credit spreads. When this is violated, the CDS price can be viewed as an upper bound on the price of credit risk, while the spread provides a lower bound. The paper shows that the CDS market is the main forum for credit risk price discovery and that CDS prices are better integrated with firm-specific variables in the short run. Both markets equally reflect these factors in the long run, and this is primarily brought about by bond market adjustment.

Suggested Citation

  • Roberto Blanco & Simon Brennan & Ian W. Marsh, 2004. "An empirical analysis of the dynamic relationship between investment grade bonds and credit default swaps," Working Papers 0401, Banco de España.
    • Handle: RePEc:bde:wpaper:0401
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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/04/Fic/dt0401e.pdf
    File Function: First version, January 2004
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