An Empirical Comparison of Credit Spreads between the Bond Market and the Credit Default Swap Market

Zhu, Haibin

doi:10.2139/ssrn.477501

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An Empirical Comparison of Credit Spreads between the Bond Market and the Credit Default Swap Market

EFMA 2004 Basel Meetings Paper

BIS Working Paper No. 160

37 Pages Posted: 20 Sep 2007

See all articles by Haibin Zhu

Haibin Zhu

Bank for International Settlements (BIS)

Date Written: August 2004

Abstract

This paper compares the pricing of credit risk in the bond market and the fast-growing credit default swap (CDS) market. The empirical findings confirm the theoretical prediction that bond spreads and CDS spreads move together in the long run. Nevertheless, in the short run this relationship does not always hold. My study shows that the deviation is largely due to different responses of the two markets to changes in credit conditions. In particular, the CDS market appears to move ahead of the bond market in price discovery.

Keywords: Credit Derivatives, Credit Risk, Time Series Analysis; price discovery

JEL Classification: G1

Suggested Citation: Suggested Citation

Zhu, Haibin, An Empirical Comparison of Credit Spreads between the Bond Market and the Credit Default Swap Market (August 2004). EFMA 2004 Basel Meetings Paper, BIS Working Paper No. 160, Available at SSRN: https://ssrn.com/abstract=477501 or http://dx.doi.org/10.2139/ssrn.477501