Price discovery in the markets for credit risk: a Markov switching approach

Thomas Dimpfl and Peter Franziska J.
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Peter Franziska J.: University of Tübingen, Department of Statistics, Econometrics, and Empirical Economics, Mohlstr. 36, 72074 Tübingen, Germany

Studies in Nonlinear Dynamics & Econometrics, 2016, vol. 20, issue 3, 233-249

Abstract: We examine price discovery in the Credit Default Swap and corporate bond market. Using a Markov switching framework enables us to analyze the dynamic behavior of the information shares during tranquil and crisis periods. The results show that price discovery takes place mostly on the CDS market. The importance of the CDS market even increases during the more volatile crisis periods. According to a cross sectional analysis liquidity is the main determinant of a market’s contribution to price discovery. During the crisis period, however, we also find a positive link between leverage and CDS market information shares. Overall the results indicate that price discovery measures and their determinants change during tranquil and crisis periods, which emphasizes the importance of more flexible frameworks, such as Markov switching models.

Keywords: corporate bond; credit default swap; Markov switching; price discovery; unique information share (search for similar items in EconPapers)
JEL-codes: C14 G15 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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DOI: 10.1515/snde-2015-0032

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