The Link Between Eurozone Sovereign Debt and CDS Prices PDF Download

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The Link Between Eurozone Sovereign Debt and CDS Prices

The Link Between Eurozone Sovereign Debt and CDS Prices PDF Author: Dominic O'Kane
Publisher:
ISBN:
Category : Bonds
Languages : en
Pages : 16

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Book Description
"We perform a theoretical and empirical analysis of the relationship between the price of Eurozone sovereign-linked credit default swaps (CDS) and the same sovereign bond markets during the Eurozone debt crisis of 2009-2011. We first present a simple model which establishes the no-arbitrage relationship between CDS and bond yield spreads. We then test this relationship empirically and explain why the market may deviate from it. Reasons include the different currencies of denomination of market-standard CDS and their reference obligations. We also examine whether CDS spread cause changes in bond spreads, and vice-versa, in a Granger sense."--Abstract. We find evidence for a Granger causal relationship with a one day lag from CDS to bonds for Greece and Spain, the reverse relationship for France and Italy and a feedback relationship for Ireland and Portugal.