The Comovement of Credit Default Swap, Bond and Stock Markets: An Empirical Analysis

Martin Weber and Lars Norden

No 4674, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper analyses the empirical relationship between credit default swap, bond and stock markets during the period 2000-02. Focusing on the intertemporal comovement, we examine 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 significantly more sensitive to the stock market than the bond market and the magnitude of this sensitivity increases when credit quality becomes worse. Finally, the CDS market plays a more important role for price discovery than the corporate bond market.

Keywords: Credit risk; Credit spreads; Credit derivatives; Lead-lag relationship (search for similar items in EconPapers)
JEL-codes: C32 G10 G14 (search for similar items in EconPapers)
Date: 2004-10
New Economics Papers: this item is included in nep-cfn, nep-fin, nep-fmk and nep-rmg
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Citations: View citations in EconPapers (54)

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Working Paper: The comovement of credit default swap, bond and stock markets: An empirical analysis (2004)
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