The Interactions Between the Credit Default Swap and the Bond Markets in Financial Turmoil

Virginie Coudert () and Mathieu Gex

Working Papers from CEPII research center

Abstract: We analyse the links between credit default swap (CDS) and bond spreads and try to determine which one is the leading market in the price discovery process. To do that, we construct a sample of CDS premia and bonds spreads on a generic 5-year bond, for 17 financials and 18 sovereigns. First, we run VECM estimations, showing that the CDS market has a lead over the bond market over the whole sample. A decomposition of the sample shows that this result holds for financials as well as for the high-yield emerging sovereigns. However, the bond market still drives the CDS market for the sovereigns in the core of the euro area. Second, we check for non-linearities in the adjustment process during the current crisis. Results show that the CDS market's lead has been amplified by the crisis for financial institutions.

Keywords: Financial crisis; Credit default swaps; Bonds; Price discovery process (search for similar items in EconPapers)
JEL-codes: G01 G15 (search for similar items in EconPapers)
Date: 2011-02
New Economics Papers: this item is included in nep-ban
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Journal Article: The Interactions between the Credit Default Swap and the Bond Markets in Financial Turmoil (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:cii:cepidt:2011-02

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