Valuation Differences between Credit Default Swap and Corporate Bond Markets
University of Passau
Catholic University of Eichstaett-Ingolstadt
University of Augsburg
July 31, 2010
Journal of Credit Risk, Forthcoming
This paper quantifies and explains valuation differences between credit default swaps and corporate bonds from a sample of European investment-grade firms. Based on all information gained through the calibration of a stochastic intensity credit model to the time series of the issuer’s CDS curve, we define a new corporate bond-specific measure for the valuation difference. Our results show that, on average, risk premia implied in corporate bonds exceed those in CDS markets by a much smaller extent than found in previous studies. Using panel data analysis we detect among others a cross-sectional influence of bond liquidity measures and find a significant impact of the general level of credit risk on the time series variation of the valuation difference.
Number of Pages in PDF File: 44
Keywords: credit default swap, credit risk, corporate bond, stochastic intensity model
JEL Classification: G12, G13, G15Accepted Paper Series
Date posted: August 14, 2010 ; Last revised: May 13, 2013
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