How Does Sovereign Bond Market Integration Relate to Fundamentals and CDS Spreads?

81 Pages Posted: 4 Aug 2016 Last revised: 12 Dec 2018

See all articles by Ines Chaieb

Ines Chaieb

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute

Vihang R. Errunza

McGill University - Desautels Faculty of Management

Rajna Gibson

University of Geneva - Geneva Finance Research Institute (GFRI)

Date Written: March 16, 2017

Abstract

There is significant heterogeneity in the degree and dynamics of sovereign bond market integration across 21 developed and 18 emerging countries. We show that better spanning can significantly enhance market integration through local risk premia dissipation. Integration of the sovereign bond markets increases on average by about 10%, when a country moves from the 25th percentile to the 75th percentile as a result of higher political stability and credit quality, lower inflation and inflation risk, and lower illiquidity. The 10% increase in integration leads to, on average, a decrease in the sovereign cost of funding of about 1% per annum.

Keywords: CDS spreads, credit quality, currency risk, liquidity, macroeconomic risk, political risk, sovereign bond market integration, sovereign funding cost.

JEL Classification: G15, G12, E44, F31, C5.

Suggested Citation

Chaieb, Ines and Errunza, Vihang R. and Gibson, Rajna, How Does Sovereign Bond Market Integration Relate to Fundamentals and CDS Spreads? (March 16, 2017). Swiss Finance Institute Research Paper No. 16-52. Available at SSRN: https://ssrn.com/abstract=2818266 or http://dx.doi.org/10.2139/ssrn.2818266

Ines Chaieb (Contact Author)

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland
+41223798568 (Phone)

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Vihang R. Errunza

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
514-398-4056 (Phone)
514-398-3876 (Fax)

Rajna Gibson

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland
+41.22.379.89.83 (Phone)

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