The Co‐movement of Credit Default Swap,Bond and Stock Markets: an Empirical Analysis |
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Authors: | Lars Norden Martin Weber |
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Affiliation: | 1. Department of Banking and Finance, University of Mannheim, L 5.2, 68131 Mannheim, Germany, and Centre for Economic Policy Research (CEPR), London, UK E‐mail: norden@bank.BWL.uni‐mannheim.de;2. weber@bank.BWL.uni‐mannheim.de |
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Abstract: | We analyse the relationship between credit default swap (CDS), bond and stock markets during 2000–2002. Focusing on the intertemporal co‐movement, we examine monthly, weekly and daily lead‐lag relationships in a vector autoregressive model and the adjustment between markets caused by cointegration. First, we find that stock returns lead CDS and bond spread changes. Second, CDS spread changes Granger cause bond spread changes for a higher number of firms than vice versa. Third, the CDS market is more sensitive to the stock market than the bond market and the strength of the co‐movement increases the lower the credit quality and the larger the bond issues. Finally, the CDS market contributes more to price discovery than the bond market and this effect is stronger for US than for European firms. |
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Keywords: | credit risk credit spreads credit derivatives lead‐lag relationship G10 G14 G21 |
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