An Empirical Analysis of the Dynamic Dependences in the European Corporate Credit Markets: Bonds vs. Credit Derivatives

38 Pages Posted: 4 Dec 2010 Last revised: 12 Nov 2012

Sergio Mayordomo

Banco de España

Juan Ignacio Peña

Universidad Carlos III de Madrid - Department of Business Administration

Date Written: November 12, 2012

Abstract

This paper provides new evidence on the dynamic dependences of European corporate credit spread in three markets: Bond, Credit Default Swap (CDS), and Asset Swap (ASP). Using daily data from 2005 to 2009, we find that credit spread returns are primarily driven by innovations. The intra-market dependence during the current crisis decreases for bond and ASP innovations but increases for CDS due to the increase of counterparty risk. ASP and bond innovations are closely related suggesting that the cash component (bond) dominates the ASP innovations’ behavior. On the other hand, CDS’s innovations are unrelated to the bonds’ and ASP’s innovations.

Keywords: Credit Spreads, Market Dynamic Dependence, DCC-GARCH

JEL Classification: C32, C51, G13, G14

Suggested Citation

Mayordomo, Sergio and Peña, Juan Ignacio, An Empirical Analysis of the Dynamic Dependences in the European Corporate Credit Markets: Bonds vs. Credit Derivatives (November 12, 2012). Available at SSRN: https://ssrn.com/abstract=1719287 or http://dx.doi.org/10.2139/ssrn.1719287

Sergio Mayordomo (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Juan Ignacio Peña

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain
34 91 624 9625 (Phone)
34 91 624 9608 (Fax)

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