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
Date Written: November 12, 2012
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: Suggested Citation