An empirical analysis of the dynamic relationship between investment grade bonds and credit default swaps

Roberto Blanco, Simon Brennan () and Ian Marsh ()
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Simon Brennan: Bank of England

No 401, Working Papers from Banco de España

Abstract: This paper analyses the behaviour of credit default swaps (CDS) for a sample of firms and finds support for the theoretical equivalence of CDS prices and credit spreads. When this is violated, the CDS price can be viewed as an upper bound on the price of credit risk, while the spread provides a lower bound. The paper shows that the CDS market is the main forum for credit risk price discovery and that CDS prices are better integrated with firm-specific variables in the short run. Both markets equally reflect these factors in the long run, and this is primarily brought about by bond market adjustment.

Keywords: Credit default swaps; credit spreads; price discovery (search for similar items in EconPapers)
Pages: 44 pages
Date: 2004-01
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Citations: View citations in EconPapers (23)

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http://www.bde.es/f/webbde/SES/Secciones/Publicaci ... o/04/Fic/dt0401e.pdf First version, January 2004 (application/pdf)

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Working Paper: An empirical analysis of the dynamic relationship between investment-grade bonds and credit default swaps (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:0401

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