Credit-risk valuation in the sovereign CDS and bonds markets :
Arce, Oscar
Credit-risk valuation in the sovereign CDS and bonds markets : evidence from the euro area crisis / Oscar Arce, Sergio Mayordomo, Juan Ignacio Peña. - Madrid : CNMV, 2012 - 41 p. - Documentos de trabajo ; no. 53 2172-6337 . - Documentos de trabajo (Comisión Nacional del Mercado de Valores) no. 53 .
Bibliografía: p. 47-50.
We analyse the extent to which prices in the sovereign credit default swap (CDS) and bond markets reflect the same information on credit risk in the context of the European Monetary Union. The empirical analysis is based on the theoretical equivalence relation that should hold between the CDS and bond spreads in a frictionless environment. We first test and find evidence in favour of the existence of persistent
deviations between both spreads during the crisis but not before. Such deviations are found to be related to some market frictions, like counterparty risk, market illiquidity, and funding costs. We also find evidence suggesting that the price-discovery
process is state-dependent. Specifically, the levels of counterparty and global risk, funding costs, market liquidity, volume of debt purchases by the European Central Bank in the secondary market, and the banks’ willingness to accept losses on their holdings of Greek bonds are found to be significant factors in determining which market leads price discovery.
RIESGO DEL CREDITO
BONOS
EUROPA
RIESGO DE SOLVENCIA
Credit-risk valuation in the sovereign CDS and bonds markets : evidence from the euro area crisis / Oscar Arce, Sergio Mayordomo, Juan Ignacio Peña. - Madrid : CNMV, 2012 - 41 p. - Documentos de trabajo ; no. 53 2172-6337 . - Documentos de trabajo (Comisión Nacional del Mercado de Valores) no. 53 .
Bibliografía: p. 47-50.
We analyse the extent to which prices in the sovereign credit default swap (CDS) and bond markets reflect the same information on credit risk in the context of the European Monetary Union. The empirical analysis is based on the theoretical equivalence relation that should hold between the CDS and bond spreads in a frictionless environment. We first test and find evidence in favour of the existence of persistent
deviations between both spreads during the crisis but not before. Such deviations are found to be related to some market frictions, like counterparty risk, market illiquidity, and funding costs. We also find evidence suggesting that the price-discovery
process is state-dependent. Specifically, the levels of counterparty and global risk, funding costs, market liquidity, volume of debt purchases by the European Central Bank in the secondary market, and the banks’ willingness to accept losses on their holdings of Greek bonds are found to be significant factors in determining which market leads price discovery.
RIESGO DEL CREDITO
BONOS
EUROPA
RIESGO DE SOLVENCIA