The Co-movement of Credit Default Swap, Bond and Stock Markets: an Empirical Analysis
We analyse the relationship between credit default swap (CDS), bond and stock markets during 2000–2002. Focusing on the intertemporal co-movement, we examine monthly, 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 more sensitive to the stock market than the bond market and the strength of the co-movement increases the lower the credit quality and the larger the bond issues. Finally, the CDS market contributes more to price discovery than the bond market and this effect is stronger for US than for European firms.
|Keywords||credit derivatives, credit risks, credit spreads, lead-lag relationship|
|JEL||General Financial Markets: General (jel G10), Information and Market Efficiency; Event Studies (jel G14), Banks; Other Depository Institutions; Mortgages (jel G21)|
|Persistent URL||dx.doi.org/10.1111/j.1468-036X.2007.00427.x, hdl.handle.net/1765/22276|
|Series||ERIM Article Series (EAS)|
|Journal||European Financial Management|
Norden, L, & Weber, M. (2009). The Co-movement of Credit Default Swap, Bond and Stock Markets: an Empirical Analysis. European Financial Management, 15(3), 529–562. doi:10.1111/j.1468-036X.2007.00427.x