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The Relative Role of Sovereign CDS and Bond Markets in Efficiently Pricing Emerging Market Sovereign Credit Risk

Zubair Ali Raja, William J. Procasky and Renee Oyotode-Adebile

Journal of Emerging Market Finance, 2020, vol. 19, issue 3, 296-325

Abstract: Extant literature reports mixed findings on the relative efficiency of credit default swaps (CDS) and bond markets in pricing emerging market sovereign credit risk. Using a more comprehensive data set than analyzed earlier, we reexamine this issue and find that CDS dominate bonds in the price discovery of this risk, an advantage we attribute to the greater relative liquidity of that market. One exception is during the financial crisis, suggesting that when panic hits, sovereign markets price credit risk differently. However, even then, the CDS market has a greater impact on price discovery than the bond market, indicating greater overall efficiency. JEL Classification: G11, G12, G13, G14, G23

Keywords: Credit default swaps; sovereign debt; emerging markets; market efficiency; price discovery (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1177/0972652720932772

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Handle: RePEc:sae:emffin:v:19:y:2020:i:3:p:296-325