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The Comovement of Credit Default Swap, Bond and Stock Markets: An Empirical Analysis

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  • Weber, Martin
  • Norden, Lars

Abstract

This Paper analyses the empirical relationship between credit default swap, bond and stock markets during the period 2000-02. 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

  • Weber, Martin & Norden, Lars, 2004. "The Comovement of Credit Default Swap, Bond and Stock Markets: An Empirical Analysis," CEPR Discussion Papers 4674, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4674
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    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
    • 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

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