Credit default swaps and sovereign debt markets |
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| Affiliation: | 1. Stetson School of Business and Economics, Mercer University, 1400 Coleman Avenue, Macon, GA 31207, United States;2. Department of Economics and Finance, University of New Orleans, 2000 lakeshore Dr, New Orleans, LA 70148, United States;3. Nottingham University Business School, The University of Nottingham Malaysia campus, Jalan Broga, Semenyih 43500, Selangor, Malaysia;1. LEO-Laboratoire d''Economie d''Orléans, University of Orléans, France;2. Lebow College of Business, Drexel University, Philadelphia, PA, USA;3. IPAG Business School, Paris, France;4. Department of Economics, University of Pretoria, Pretoria 0002, South Africa |
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| Abstract: | This study investigates the link between the price discovery dynamics in sovereign credit default swaps (CDS) and bond markets and the degree of financial integration of emerging markets. Using CDS and sovereign bond spreads, the price discovery mechanism was tested using a vector error correction model. Financial integration is measured using news-based methods. We find that sovereign CDS and bond markets are co-integrated. In five out of seven sovereigns (71%), the bond market leads in price discovery by adjusting to new information regarding credit risk before CDS. In 29% of times, CDS markets are the source of price discovery. We also find a positive correlation of 0.67 between the degree of financial integration and the bond market information share. The evidence suggests that changes in sovereign credit risk and bond yields are significantly influenced by common external (global) factors, while country-specific factors play an insignificant role. |
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| Keywords: | Price discovery Financial integration CDS Sovereign bonds Credit risk |
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