Valuation Differences between Credit Default Swap and Corporate Bond Markets

Journal of Credit Risk, Vol. 9, No. 4, pp. 3-46, 2013

44 Pages Posted: 14 Aug 2010 Last revised: 7 Jan 2014

Oliver Entrop

University of Passau

Richard Schiemert

Catholic University of Eichstaett-Ingolstadt

Marco Wilkens

University of Augsburg

Date Written: July 31, 2010

Abstract

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.

Keywords: credit default swap, credit risk, corporate bond, stochastic intensity model

JEL Classification: G12, G13, G15

Suggested Citation

Entrop, Oliver and Schiemert, Richard and Wilkens, Marco, Valuation Differences between Credit Default Swap and Corporate Bond Markets (July 31, 2010). Journal of Credit Risk, Vol. 9, No. 4, pp. 3-46, 2013. Available at SSRN: https://ssrn.com/abstract=1656893 or http://dx.doi.org/10.2139/ssrn.1656893

Oliver Entrop (Contact Author)

University of Passau ( email )

Innstrasse 27
Passau, 94032
Germany
+49 851 509 2460 (Phone)
+49 851 509 2462 (Fax)

Richard Schiemert

Catholic University of Eichstaett-Ingolstadt ( email )

Auf der Schanz 49
Ingolstadt, D-85049
Germany

HOME PAGE: http://www.schiemert.com/

Marco Wilkens

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4124 (Phone)
+49 821 598 4223 (Fax)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/wilkens_marco/

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