DP4674 The Comovement of Credit Default Swap, Bond and Stock Markets: An Empirical Analysis
|Author(s):||Lars Norden, Martin Weber|
|Publication Date:||October 2004|
|Keyword(s):||credit derivatives, credit risk, credit spreads, lead-lag relationship|
|JEL(s):||C32, G10, G14|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=4674|
This Paper analyses the empirical relationship between credit default swap, bond and stock markets during the period 2000-02. Focusing on the intertemporal comovement, we examine 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 significantly more sensitive to the stock market than the bond market and the magnitude of this sensitivity increases when credit quality becomes worse. Finally, the CDS market plays a more important role for price discovery than the corporate bond market.