An Empirical Analysis of the Dynamic Relationship between Investment Grade Bonds and Credit Default Swaps

Bank of England Working Paper No. 211

Cass Business School Research Paper

41 Pages Posted: 13 Feb 2004

See all articles by Roberto Blanco

Roberto Blanco

Banco de España

Simon Brennan

Bank of England

Ian W. Marsh

City University London - Sir John Cass Business School

Date Written: February 2004

Abstract

We analyse the behaviour of credit default swaps (CDS) for a sample of firms and find support for the theoretical equivalence of CDS prices and credit spreads. When this is violated we suggest the CDS price can be viewed as an upper bound on the price of credit risk, while the spread provides a lower bound. We show that the CDS market is the main forum for credit risk price discovery and that CDS prices are better integrated with firm-specific variables in the short-run. Both markets equally reflect these factors in the long-run, and this is primarily brought about by bond market adjustment.

Keywords: Credit derivatives, price discovery

JEL Classification: G14

Suggested Citation

Blanco, Roberto and Brennan, Simon and Marsh, Ian William, An Empirical Analysis of the Dynamic Relationship between Investment Grade Bonds and Credit Default Swaps (February 2004). Bank of England Working Paper No. 211; Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=478825 or http://dx.doi.org/10.2139/ssrn.478825

Roberto Blanco

Banco de España ( email )

Madrid 28014
Spain

Simon Brennan

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Ian William Marsh (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 7040 5121 (Phone)
+44 20 7040 8881 (Fax)

HOME PAGE: http://www.cass.city.ac.uk/faculty/i.marsh

Register to save articles to
your library

Register

Paper statistics

Downloads
1,896
Abstract Views
8,768
rank
7,895
PlumX Metrics