We are particularly grateful to an anonymous referee for helpful comments. In addition, we wish to thank Klaus Düllmann, Jens Grunert, Rainer Jankowitsch, Volker Kleff, Markus Mentz, Ingmar Nolte, Winfried Pohlmeier, Monika Trapp, Andreas Trauten, Valeri Voev, participants of the CFS Workshop on credit derivatives and CDOs in Frankfurt, Germany (2004), the 11th Annual Meeting of the German Finance Association in Tübingen, Germany (2004), the 8th Conference of the Swiss Society for Financial Market Research in Zürich, Switzerland (2005), the 4th C.R.E.D.I.T. Conference in Venice, Italy (2005), and the Deutsche Bundesbank research seminar. We also thank two members of the credit derivatives department from the bank who provided the CDS data for helpful comments and suggestions. Financial support of the German National Science Foundation is gratefully acknowledged. Correspondence: Lars Norden.
The Co-movement of Credit Default Swap, Bond and Stock Markets: an Empirical Analysis
Version of Record online: 17 DEC 2007
© 2007 The Authors Journal compilation © 2007 Blackwell Publishing Ltd
European Financial Management
Volume 15, Issue 3, pages 529–562, June 2009
How to Cite
Norden, L. and Weber, M. (2009), The Co-movement of Credit Default Swap, Bond and Stock Markets: an Empirical Analysis. European Financial Management, 15: 529–562. doi: 10.1111/j.1468-036X.2007.00427.x
- Issue online: 26 MAY 2009
- Version of Record online: 17 DEC 2007
- credit risk;
- credit spreads;
- credit derivatives;
- lead-lag relationship
We analyse the relationship between credit default swap (CDS), bond and stock markets during 2000–2002. Focusing on the intertemporal co-movement, we examine monthly, 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 more sensitive to the stock market than the bond market and the strength of the co-movement increases the lower the credit quality and the larger the bond issues. Finally, the CDS market contributes more to price discovery than the bond market and this effect is stronger for US than for European firms.