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
Date Written: July 31, 2010
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
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