The chicken or the egg? A note on the dynamic interrelation between government bond spreads and credit default swaps |
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Authors: | Manthos D Delis Nikolaos Mylonidis |
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Institution: | Department of Economics, University of Ioannina, University of Ioannina Campus, 45110, Greece |
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Abstract: | This note provides the first empirical assessment of the dynamic interrelation between government bond spreads and their associated credit default swaps (CDS). We use data for the Southern European countries (Greece, Italy, Portugal and Spain) that found themselves with a problematic public sector in the dawn of the recent financial distress. We find that CDS prices Granger-cause government bond spreads after the eruption of the 2007 sub-prime crisis. Feedback causality is detected during periods of financial and economic turmoil, thereby indicating that high risk aversion tends to perplex the transmission mechanism between CDS prices and government bond spreads. |
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Keywords: | JEL classification: G01 G12 F34 E44 |
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