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Time-Varying Price Discovery in Sovereign Credit Markets

Massimo Guidolin (), Manuela Pedio and Alessandra Tosi

No 19120, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: We analyze the time-varying nature of the price discovery process in the sovereign debt market over the sample period January 2006 – September 2015. In particular, we test whether the cointegration relationship that should tie bond and CDS spreads together holds over the entire sample. In addition, we investigate which (if any) of the two markets leads the price discovery in each of a number of sub-samples. We focus on ten European countries (Portugal, Italy, Ireland, Greece, Spain, Netherland, Germany, France, Austria, and Belgium), the UK, and the US. We find that while for all the peripheral countries but Greece the CDS and bond spreads show a long-run equilibrium relationship over the full sample, this is not the case for core European countries, the UK, and the US. Moreover, when the cointegration relationship fails to hold, none of the two markets appears to lead the price discovery process.

Keywords: Treasury bond spreads; credit default swaps; sovereign credit risk; vector error correction (search for similar items in EconPapers)
JEL-codes: C32 E52 E43 (search for similar items in EconPapers)
Pages: 24
Date: 2019
New Economics Papers: this item is included in nep-eec and nep-mac
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