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Credit-valuation in the sovereing CDS and bonds markets: Evidence from the euro area crisis

Óscar Arce, Sergio Mayordomo () and Juan Ignacio Peña

No CNMV Working Papers no. 53. 2012, CNMV Working Papers from CNMV- Spanish Securities Markets Commission - Research and Statistics Department

Abstract: CONTENTS: This paper analyses the extent to which prices in the sovereign credit default swap (CDS) and bond markets reflect the same information on credit risk in the context of the European Monetary Union. We first test and find evidence in favour of the existence of persistent deviations between both spreads during the crisis but not before. Such deviations are found to be related to some market frictions, like counterparty risk, the degree of market liquidity and funding costs. We also find evidence suggesting that the price-discovery process is state-dependent. Specifically, the levels of counterparty and global risk, funding costs, market liquidity, the volume of sovereign debt purchases by the European Central Bank in the secondary market, and the private banks’ announcement to accept losses on their holdings of Greek bonds are found to be significant factors in determining which market leads price discovery.

Keywords: sovereign credit default swaps; sovereign bonds; credit spreads; price discovery (search for similar items in EconPapers)
JEL-codes: G10 G14 G15 (search for similar items in EconPapers)
Date: 2012
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