Has the CDS Market influenced the borrowing cost of European countries during the sovereign crisis?

Anne-Laure Delatte, Mathieu Gex and Antonia Lòpez-Villavicencio ()
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Mathieu Gex: CERAG - Centre d'études et de recherches appliquées à la gestion - UPMF - Université Pierre Mendès France - Grenoble 2 - CNRS - Centre National de la Recherche Scientifique
Antonia Lòpez-Villavicencio: CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique
Authors registered in the RePEc Author Service: Antonia López Villavicencio

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Abstract: This paper assesses the potential influence of the growing CDS market on the borrowing cost of sovereign states during the European sovereign crisis. We analyze the sovereign debt market to ascertain the pattern of information transmission between the CDS and corresponding bond markets. Our methodological innovation is the use of a non-linear specification rather than the linear VECM specification customarily employed. Using a panel smooth transition model during the 2008-2010 period, we find that: 1) linearity tests clearly reject the null hypothesis of a linear transmission mechanisms between the bond and the CDS markets; 2) market distress alters the mutual influence and 3) the higher the distress the more the CDS market dominates the information transmission between CDS and bond markets.

Keywords: Sovereign credit default swaps; European sovereign crisis; Nonlinearity; Cointegration; Price discovery process (search for similar items in EconPapers)
Date: 2012-04
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Published in Journal of International Money and Finance, 2012, Vol. 31 (Issue 3), p. 481-497

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Related works:
Journal Article: Has the CDS market influenced the borrowing cost of European countries during the sovereign crisis? (2012)
Working Paper: Has the CDS Market Influenced the Borrowing Cost of European Countries During the Sovereign Crisis? (2012)
Working Paper: Has the CDS market influenced the borrowing cost of European countries during the sovereign crisis? (2011)
Working Paper: Has the CDS market influenced the borrowing cost of European countries during the sovereign crisis? (2011)
Working Paper: Has the CDS market influenced the borrowing cost of European countries during the sovereign crisis (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00739732

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