The Comovement of Credit Default Swap, Bond and Stock Markets: An Empirical Analysis
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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
|Date of creation:||Oct 2004|
|Date of revision:|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- 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.
- 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.
- Francis A. Longstaff & Sanjay Mithal & Eric Neis, 2004. "Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit-Default Swap Market," NBER Working Papers 10418, National Bureau of Economic Research, Inc.
- Gonzalo, J. & Granger, C., 1992.
"Estimation of Common Long-Memory Components in Cointegrated Systems,"
4, Boston University - Department of Economics.
- 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.
- Roberto Blanco & Simon Brennan & Ian W. Marsh, 2004.
"An empirical analysis of the dynamic relationship between investment grade bonds and credit default swaps,"
0401, Banco de España;Working Papers Homepage.
- 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.
- 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.
- Houweling, P. & Vorst, A.C.F., 2002.
"An Empirical Comparison of Default Swap Pricing Models,"
ERIM Report Series Research in Management
ERS-2002-23-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
- Houweling, P. & Vorst, A.C.F., 2002. "An Empirical Comparison of Default Swap Pricing Models," Econometric Institute Research Papers ERS-2002-23-F&A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
- Patrick Houweling & Ton Vorst, 2002. "An Empirical Comparison of Default Swap Pricing Models," Tinbergen Institute Discussion Papers 02-004/2, Tinbergen Institute.
- Patrick Houweling & Ton Vorst, 2001. "An Empirical Comparison of Default Swap Pricing Models," Finance 0112003, EconWPA.
- 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.
- Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
- Engle, Robert & Granger, Clive, 2015.
"Co-integration and error correction: Representation, estimation, and testing,"
Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
- James H. Stock & Mark W. Watson, 2001. "Vector Autoregressions," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 101-115, Fall.
- Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
- 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.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:4674. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()The email address of this maintainer does not seem to be valid anymore. Please ask to update the entry or send us the correct email address
If references are entirely missing, you can add them using this form.