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Time-varying contributions by the corporate bond and CDS markets to credit risk price discovery


  • Dötz, Niko


This paper looks at the dynamic price relationship between spreads in the corporate bond market and credit default swaps (CDS). It picks up where Blanco et al (2005) leave off but is focused on European credit markets. The study is based on companies listed in the iTraxx CDS index and thus on new data on a more liquid CDS market. Unlike previous studies, which look at price formation in a time-invariant context, the contributions of both markets to price discovery are analysed in a timevariant context. We devote particular attention to the question of whether such information input is stable in times of crisis and find that, although the CDS market slightly dominates the price discovery process, its contribution fell visibly during the turbulence on the credit markets in early 2005 in favour of that of the bond market.

Suggested Citation

  • Dötz, Niko, 2007. "Time-varying contributions by the corporate bond and CDS markets to credit risk price discovery," Discussion Paper Series 2: Banking and Financial Studies 2007,08, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdp2:5904

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    References listed on IDEAS

    1. Hashem Pesaran & Davide Pettenuzzo & Allan Timmermann, 2007. "Learning, Structural Instability, and Present Value Calculations," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 253-288.
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    Cited by:

    1. Eisenkopf, Gerald & Hessami, Zohal & Fischbacher, Urs & Ursprung, Heinrich W., 2015. "Academic performance and single-sex schooling: Evidence from a natural experiment in Switzerland," Journal of Economic Behavior & Organization, Elsevier, vol. 115(C), pages 123-143.
    2. Alter, Adrian & Schüler, Yves S., 2012. "Credit spread interdependencies of European states and banks during the financial crisis," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3444-3468.

    More about this item


    price discovery; credit risk; corporate bonds; credit derivatives; Kalman filter;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • 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

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