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Study of Consistency of Bond and CDS Quotes

Author

Listed:
  • Marat Kurbangaleev

    () (National Research University Higher School of Economics)

  • Victor Lapshin

    () (National Research University Higher School of Economics)

  • Sergey N. Smirnov

    () (National Research University Higher School of Economics)

Abstract

In this paper, we study the consistency of bonds and CDS quotes data within a widely accepted credit risk pricing framework, allowing for non-trivial term structures of risk-free interest rates and default intensities. We propose an approach to test this consistency and a procedure to deal with inconsistencies. Our approach is model-independent and does not rely on any term structure fitting method. It also allows us to assess the precision of constructing risk-free yield term structure can be estimated for a given bond and CDS quotes set. We apply the proposed approach to euro zone sovereign bond and CDS data, and demonstrate that, in general, bond/CDS quotes are typically inconsistent across issuers and require filtration. However, our findings suggest grouping the euro zone sovereign issuers according to the group-level internal consistency

Suggested Citation

  • Marat Kurbangaleev & Victor Lapshin & Sergey N. Smirnov, 2015. "Study of Consistency of Bond and CDS Quotes," HSE Working papers WP BRP 43/FE/2015, National Research University Higher School of Economics.
  • Handle: RePEc:hig:wpaper:43/fe/2015
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    File URL: http://www.hse.ru/data/2015/04/02/1096586306/43FE2015.pdf
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    References listed on IDEAS

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    1. Fontana, Alessandro & Scheicher, Martin, 2016. "An analysis of euro area sovereign CDS and their relation with government bonds," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 126-140.
    2. Calice, Giovanni & Chen, Jing & Williams, Julian, 2013. "Liquidity spillovers in sovereign bond and CDS markets: An analysis of the Eurozone sovereign debt crisis," Journal of Economic Behavior & Organization, Elsevier, vol. 85(C), pages 122-143.
    3. 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.
    4. Houweling, Patrick & Vorst, Ton, 2005. "Pricing default swaps: Empirical evidence," Journal of International Money and Finance, Elsevier, vol. 24(8), pages 1200-1225, December.
    5. Patrick Houweling & Ton Vorst, 2001. "An Empirical Comparison of Default Swap Pricing Models," Finance 0112003, University Library of Munich, Germany.
    6. Hull, John & Predescu, Mirela & White, Alan, 2004. "The relationship between credit default swap spreads, bond yields, and credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2789-2811, November.
    7. Bühler, Wolfgang & Trapp, Monika, 2009. "Time-varying credit risk and liquidity premia in bond and CDS markets," CFR Working Papers 09-13, University of Cologne, Centre for Financial Research (CFR).
    8. Roberto Blanco & Simon Brennan & Ian W. Marsh, 2005. "An Empirical Analysis of the Dynamic Relation between Investment‐Grade Bonds and Credit Default Swaps," Journal of Finance, American Finance Association, vol. 60(5), pages 2255-2281, October.
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    10. Palladini, Giorgia & Portes, Richard, 2011. "Sovereign CDS and Bond Pricing Dynamics in the Euro-area," CEPR Discussion Papers 8651, C.E.P.R. Discussion Papers.
    11. Haibin Zhu, 2006. "An Empirical Comparison of Credit Spreads between the Bond Market and the Credit Default Swap Market," Journal of Financial Services Research, Springer;Western Finance Association, vol. 29(3), pages 211-235, June.
    12. Michael Adler & Jeong Song, 2010. "The behavior of emerging market sovereigns' credit default swap premiums and bond yield spreads," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(1), pages 31-58.
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    More about this item

    Keywords

    feasibility band; data consistency; risk-free interest rates; term structure of credit spreads; sovereign default risk; euro zone; defaultable bond; credit default swa;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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