Time‐Varying Price Discovery in Sovereign Credit Markets

24 Pages Posted: 30 Oct 2019

See all articles by Massimo Guidolin

Massimo Guidolin

Bocconi University - Department of Finance

Manuela Pedio

Bocconi University - CAREFIN - Centre for Applied Research in Finance

Alessandra Tosi

Bocconi University

Date Written: October 2019

Abstract

We analyze the time-varying nature of the price discovery process in the sovereign debt market over the sample period January 2006 – September 2015. In particular, we test whether the cointegration relationship that should tie bond and CDS spreads together holds over the entire sample. In addition, we investigate which (if any) of the two markets leads the price discovery in each of a number of sub-samples. We focus on ten European countries (Portugal, Italy, Ireland, Greece, Spain, Netherland, Germany, France, Austria, and Belgium), the UK, and the US. We find that while for all the peripheral countries but Greece the CDS and bond spreads show a long-run equilibrium relationship over the full sample, this is not the case for core European countries, the UK, and the US. Moreover, when the cointegration relationship fails to hold, none of the two markets appears to lead the price discovery process.

Keywords: Treasury bond spreads, credit default swaps, sovereign credit risk, vector error correction models, price discovery

JEL Classification: C32, E52, E43

Suggested Citation

Guidolin, Massimo and Pedio, Manuela and Tosi, Alessandra, Time‐Varying Price Discovery in Sovereign Credit Markets (October 2019). BAFFI CAREFIN Centre Research Paper No. 2019-120. Available at SSRN: https://ssrn.com/abstract=3477308

Massimo Guidolin (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Manuela Pedio

Bocconi University - CAREFIN - Centre for Applied Research in Finance ( email )

Via Sarfatti, 25
Milan, 20136
Italy

Alessandra Tosi

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

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