How Does Sovereign Bond Market Integration Relate to Fundamentals and CDS Spreads?

Ines Chaieb, Vihang R. Errunza and Rajna Gibson
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Vihang R. Errunza: McGill University
Rajna Gibson: University of Geneva and Swiss Finance Institute

No 16-52, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We observe significant heterogeneity across countries and maturities in the degree and dynamics of sovereign bond market integration. We analyze the role of credit quality, political and inflation risks, liquidity and investor sentiment in integrating developed and emerging bond markets and show that political risk and credit quality are the dominant factors. Bond market integration is significantly negatively related to sovereign CDS spreads. A one percent increase in integration corresponds to an average decrease in the cost of funding of about 3% of the average observed 5-year CDS spreads across all developed bond markets.

Keywords: credit quality; CDS spreads; funding cost; liquidity; macroeconomic risk; market integration; political risk; sovereign bond markets (search for similar items in EconPapers)
JEL-codes: C5 E44 F31 G12 G15 (search for similar items in EconPapers)
Pages: 79 pages
Date: 2016-07
New Economics Papers: this item is included in nep-fmk and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1652

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