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An empirical analysis of dynamic dependences in the European corporate credit markets: bonds versus credit derivatives

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  • Sergio Mayordomo
  • Juan Ignacio Pe�a

Abstract

This article provides new evidence on the dynamic dependences of European corporate credit spread in three markets: bond, Credit Default Swap (CDS) and Asset Swap (ASP). Using daily data from 2005 to 2011, we find that credit spread returns are primarily driven by innovations. The intra-market dependence decreases for bond and ASP innovations during the 2007--2009 subprime crisis but increases for CDS due to the increase of counterparty risk. After the summer of 2009, we find a convergence to the precrisis levels. ASP and bond innovations are closely related suggesting that the cash component (bond) dominates the ASP innovations' behaviour. On the other hand, CDS's innovations are unrelated to the bonds' and ASP's innovations.

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  • Sergio Mayordomo & Juan Ignacio Pe�a, 2014. "An empirical analysis of dynamic dependences in the European corporate credit markets: bonds versus credit derivatives," Applied Financial Economics, Taylor & Francis Journals, vol. 24(9), pages 605-619, May.
    • Handle: RePEc:taf:apfiec:v:24:y:2014:i:9:p:605-619
    DOI: 10.1080/09603107.2014.894627
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    Cited by:

    1. Óscar Arce & Sergio Mayordomo & Juan Ignacio Peña, 2012. "Credit-valuation in the sovereing CDS and bonds markets: Evidence from the euro area crisis," CNMV Working Papers CNMV Working Papers no. 5, CNMV- Spanish Securities Markets Commission - Research and Statistics Department.
    2. Mayordomo, Sergio & Rodriguez-Moreno, Maria & Peña, Juan Ignacio, 2014. "Liquidity commonalities in the corporate CDS market around the 2007–2012 financial crisis," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 171-192.
    3. Arce, Oscar & Mayordomo, Sergio & Peña, Juan Ignacio, 2013. "Credit-risk valuation in the sovereign CDS and bonds markets: Evidence from the euro area crisis," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 124-145.
    4. Christian Meine & Hendrik Supper & Gregor Weiß, 2015. "Do CDS spreads move with commonality in liquidity?," Review of Derivatives Research, Springer, vol. 18(3), pages 225-261, October.

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