An Empirical Analysis of the Dynamic Relationship between Investment Grade Bonds and Credit Default Swaps
Bank of Spain
Bank of England
Ian W. Marsh
City University London - Sir John Cass Business School
Bank of England Working Paper No. 211
Cass Business School Research Paper
We analyse the behaviour of credit default swaps (CDS) for a sample of firms and find support for the theoretical equivalence of CDS prices and credit spreads. When this is violated we suggest the CDS price can be viewed as an upper bound on the price of credit risk, while the spread provides a lower bound. We show that the CDS market is the main forum for credit risk price discovery and that CDS prices are better integrated with firm-specific variables in the short-run. Both markets equally reflect these factors in the long-run, and this is primarily brought about by bond market adjustment.
Number of Pages in PDF File: 41
Keywords: Credit derivatives, price discovery
JEL Classification: G14working papers series
Date posted: February 13, 2004
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