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Did the CDS Market Push up Risk Premia for Sovereign Credit?

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  • Sergio Andenmatten
  • Felix Brill

Abstract

We examine the empirical relationship between credit default swap (CDS) premia and government bond spreads for Portugal, Italy, Ireland, Greece, and Spain (the 'PIIGS' countries). We find some evidence for a long-run relationship in the sense of cointegration for the two markets. In most cases (five out of seven), only CDS premia contribute to the price discovery process. In the other cases, both markets make a more or less equal contribution. All in all, this suggests that bond spreads react only sluggishly to long-term imbalances, as measured by the cointegrating relationship. In light of this, we can conclude that, in most cases, CDS markets are leading markets if there is a long-run relationship between the CDS and gov-ernment bond spread markets. This may partly be due to liquidity effects.

Suggested Citation

  • Sergio Andenmatten & Felix Brill, 2011. "Did the CDS Market Push up Risk Premia for Sovereign Credit?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 147(III), pages 275-302, September.
    • Handle: RePEc:ses:arsjes:2011-iii-1
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    References listed on IDEAS

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    Cited by:

    1. Jorge M. Andraz & Cristina M. Viegas & Nélia M. Norte, 2016. "On the relationship between sovereign bonds and credit default swaps in Portugal," International Journal of Economic Sciences, International Institute of Social and Economic Sciences, vol. 5(1), pages 18-36, March.
    2. Michele Anelli & Michele Patanè, 2022. "The Role of CDS Market in the Price Discovery Process of the “PIIGS†Countries Sovereign Credit Risk During the Recent Decade of Monetary Easing," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 11(1), pages 1-1.
    3. Büchel, Konstantin, 2013. "Do words matter? The impact of communication on the PIIGS' CDS and bond yield spreads during Europe's sovereign debt crisis," European Journal of Political Economy, Elsevier, vol. 32(C), pages 412-431.
    4. Sergio Andenmatten & Felix Brill, 2011. "Measuring Co-Movements of CDS Premia during the Greek Debt Crisis," Diskussionsschriften dp1104, Universitaet Bern, Departement Volkswirtschaft.
    5. Jorge Miguel Lopo Gonçalves Andraz & Nélia Maria Afonso Norte, 2019. "Who leads the price determination in periods of financial distress: Credit default swaps or bonds spreads? Evidence for a set of EU member States," CEFAGE-UE Working Papers 2019_04, University of Evora, CEFAGE-UE (Portugal).

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    More about this item

    Keywords

    Greek debt crisis; sovereign credit; CDS market; price discovery;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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