The Comovement of Credit Default Swap, Bond and Stock Markets: An Empirical Analysis

45 Pages Posted: 16 Dec 2004

See all articles by Martin Weber

Martin Weber

University of Mannheim - Department of Banking and Finance

Lars Norden

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE); Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finan├žas

Date Written: October 2004

Abstract

This Paper analyzes the empirical relationship between credit default swap, bond and stock markets during the period 2000-2002. Focusing on the intertemporal comovement, we examine weekly and daily lead-lag relationships in a vector autoregressive model and the adjustment between markets caused by cointegration. First, we find that stock returns lead CDS and bond spread changes. Second, CDS spread changes Granger cause bond spread changes for a higher number of firms than vice versa. Third, the CDS market is significantly more sensitive to the stock market than the bond market and the magnitude of this sensitivity increases when credit quality becomes worse. Finally, the CDS market plays a more important role for price discovery than the corporate bond market.

Keywords: Credit risk, credit spreads, credit derivatives, lead-lag relationship

JEL Classification: C32, G10, G14

Suggested Citation

Weber, Martin and Norden, Lars, The Comovement of Credit Default Swap, Bond and Stock Markets: An Empirical Analysis (October 2004). Available at SSRN: https://ssrn.com/abstract=635981

Martin Weber (Contact Author)

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

Lars Norden

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE) ( email )

Rua Jornalista Orlando Dantas 30
Rio de Janeiro, 22231-010
Brazil
+552130832431 (Phone)

HOME PAGE: http://www.larsnorden.de

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finan├žas ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
90
Abstract Views
3,127
rank
308,635
PlumX Metrics