 Price cointegration between sovereign CDS and currency option markets in the financial crises of 2007–2013Cho-Hoi Hui and Tom Fong () International Review of Economics & Finance, 2015, vol. 40, issue C, 174-190 Abstract: The sovereign credit default swap (CDS) spreads and exchange rates of the developed economies including the US, Japan, Switzerland and the eurozone with the first three countries' currencies conventionally considered as safe-haven varied in a wide range during the financial crises since late 2007. This raises the question of any interconnectivity between the anticipated sovereign credit risks of these economies and the market expectations of their exchange rates. Using a bivariate vector error-correction model with random coefficients, this paper finds evidence of cointegration and time varying conditional correlation between the prices in the sovereign CDS and currency option markets. This suggests that the relative sovereign credit risk of these developed economies impacts the market expectations of their exchange rates in the long run, but in the short run the impact changes drastically in times of crisis, resulting in drastic and persistent price deviations from their long-run equilibrium amid central banks' monetary measures and market turbulence. Keywords: Sovereign risk; Currency options; Credit default swaps; Cointegration (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:40:y:2015:i:c:p:174-190 DOI: 10.1016/j.iref.2015.02.011 Access Statistics for this article International Review of Economics & Finance is currently edited by H. Beladi and C. Chen More articles in International Review of Economics & Finance from Elsevier |
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