Price Discovery of Credit Spreads in Tranquil and Crisis Periods

Davide Avino, Emese Lazar and Simone Varotto ()

MPRA Paper from University Library of Munich, Germany

Abstract: Credit spreads can be derived from the prices of securities traded in different markets. In this paper we investigate the price discovery process in single-name credit spreads obtained from bonds, credit default swaps, equities and equity options. Using a vector error correction model (VECM) of changes in credit spreads for a sample that includes the 2007-2009 financial crisis, we find that during periods of high volatility, price discovery takes place primarily in the option market, whilst the equity market leads the other markets during tranquil periods. By adding GARCH effects to the VECM specification, we also find strong evidence of volatility spillovers from the option market to the other markets in crisis periods. Finally, we show how time-varying measures of price discovery can be generated using GARCH models.

Keywords: credit spreads; price discovery; volatility spillovers; CDS; information flow (search for similar items in EconPapers)
JEL-codes: G01 G14 G20 (search for similar items in EconPapers)
Date: 2012-06-01
New Economics Papers: this item is included in nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/42847/1/MPRA_paper_42847.pdf original version (application/pdf)

Related works:
Journal Article: Price discovery of credit spreads in tranquil and crisis periods (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:42847

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().