A Case for Europe: The Relationship between Sovereign CDs and Stock Indexes

32 Pages Posted: 19 Dec 2012

See all articles by Maria Coronado

Maria Coronado

Universidad Pontificia Comillas

M. Teresa Corzo

Universidad Pontificia Comillas

Laura Lazcano

Universidad Pontificia Comillas

Date Written: October 1, 2012

Abstract

In 2010 we witnessed a major European sovereign debt crisis. By examining the links between sovereign Credit Default Swaps and stock indexes for eight European countries during the period 2007-2010, this paper studies the lead-lag relationships of the two markets which represent a country's credit and market risk. Through the use of a Vector Autoregressive model and a panel data model we find that the stock market plays a leading role during the sample period, but when 2010 is isolated a change in this relationship appears: a key role of sovereign CDS markets – the incorporation of new information emerges. This phenomenon is most significant in countries with high risk spread.

Keywords: sovereign credit risk, sovereign credit derivatives, stock markets, lead-lag relationships

JEL Classification: G15, G14, G20

Suggested Citation

Coronado, Maria and Corzo, M. Teresa and Lazcano, Laura, A Case for Europe: The Relationship between Sovereign CDs and Stock Indexes (October 1, 2012). Frontiers in Finance and Economics, Vol. 9, No. 2, 32-63. Available at SSRN: https://ssrn.com/abstract=2190408

Maria Coronado (Contact Author)

Universidad Pontificia Comillas ( email )

United States
915422800 (Phone)
915596569 (Fax)

M. Teresa Corzo

Universidad Pontificia Comillas ( email )

Spain
915422800 (Phone)
91 5596569 (Fax)

Laura Lazcano

Universidad Pontificia Comillas ( email )

United States
91 5422800 (Phone)
915596569 (Fax)

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