Has the CDS Market Influenced the Borrowing Cost of European Countries During the Sovereign Crisis?

43 Pages Posted: 27 Aug 2011 Last revised: 24 Jul 2012

See all articles by Anne Laure Delatte

Anne Laure Delatte

Groupe ESC Rouen; Observatoire Français des Conjonctures Economiques

Mathieu Gex

University of Grenoble

Antonia López-Villavicencio

French National Center for Scientific Research (CNRS) - Centre d'économie de l'Université de Paris Nord (CEPN)

Date Written: August 22, 2011

Abstract

This paper assesses the potential influence of the growing CDS market on the borrowing cost of sovereign states during the European sovereign crisis. We analyze the sovereign debt market to ascertain the pattern of information transmission between the CDS and corresponding bond markets. Our methodological innovation is the use of a non-linear specification rather than the linear VECM specification customarily employed. Using a panel smooth transition model during the 2008-2010 period, we find that: 1) linearity tests clearly reject the null hypothesis of a linear transmission mechanisms between the bond and the CDS markets; 2) market distress alters the mutual influence and 3) the higher the distress the more the CDS market dominates the information transmission between CDS and bond markets.

Keywords: sovereign credit default swaps, European sovereign crisis, nonlinearity, cointegration, price discovery process

JEL Classification: C33, G01, G15

Suggested Citation

Delatte, Anne Laure and Gex, Mathieu and López-Villavicencio, Antonia, Has the CDS Market Influenced the Borrowing Cost of European Countries During the Sovereign Crisis? (August 22, 2011). Journal of International Money and Finance, Vol. 31, No. 3, 2012. Available at SSRN: https://ssrn.com/abstract=1917219 or http://dx.doi.org/10.2139/ssrn.1917219

Anne Laure Delatte

Groupe ESC Rouen ( email )

1, rue du Maréchal Juin - BP 188
Mont Saint Aignan Cedex, Normandy 76825
France

Observatoire Français des Conjonctures Economiques ( email )

69 Quai d'Orsay
Paris 75004
France

Mathieu Gex

University of Grenoble ( email )

Grenoble
France

Antonia López-Villavicencio (Contact Author)

French National Center for Scientific Research (CNRS) - Centre d'économie de l'Université de Paris Nord (CEPN) ( email )

UMR7115
Université Paris-Nord
Paris XIII
France

Register to save articles to
your library

Register

Paper statistics

Downloads
480
rank
54,707
Abstract Views
2,109
PlumX Metrics