Credit-Valuation in the Sovereing CDS and Bonds Markets: Evidence from the Euro Area Crisis

44 Pages Posted: 12 Jun 2019

See all articles by Oscar Arce

Oscar Arce

CNMV

Juan Ignacio Peña

Universidad Carlos III de Madrid - Department of Business Administration

Sergio Mayordomo

Banco de España

Date Written: 2012

Abstract

We analyse the extent to which prices in the sovereign credit default swap (CDS) and bond markets reflect the same information on credit risk in the context of the European Monetary Union. The empirical analysis is based on the theoretical equivalence relation that should hold between the CDS and bond spreads in a frictionless environment. We first test and find evidence in favour of the existence of persistent deviations between both spreads during the crisis but not before. Such deviations are found to be related to some market frictions, like counterparty risk, market illiquidity, and funding costs. We also find evidence suggesting that the price-discovery process is state-dependent. Specifically, the levels of counterparty and global risk, funding costs, market liquidity, volume of debt purchases by the European Central Bank in the secondary market, and the banks’ willingness to accept losses on their holdings of Greek bonds are found to be significant factors in determining which market leads price discovery.

Keywords: sovereign credit default swaps, sovereign bonds, credit spreads, price discovery

JEL Classification: G10, G14, G15

Suggested Citation

Arce, Oscar and Peña, Juan Ignacio and Mayordomo, Sergio, Credit-Valuation in the Sovereing CDS and Bonds Markets: Evidence from the Euro Area Crisis (2012). CNMV Working Paper No. 53 (2012). Available at SSRN: https://ssrn.com/abstract=3400660

Oscar Arce (Contact Author)

CNMV ( email )

C/ Miguel Ángel, 11
Madrid, Madrid 28010
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)

Sergio Mayordomo

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
30
Abstract Views
224
PlumX Metrics