Publication: An empirical analysis of the dynamic dependences in the European Corporate credit markets : bonds vs. credit derivatives
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2012-02
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Social Science Research Network
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Abstract
In this paper we provide new evidence on the determinants of credit spread returns and their dynamic
dependences in three European corporate credit markets: the Bond market (cash market), the Credit
Default Swap (CDS) market (derivatives market), and the Asset Swap Package (ASP) market (with
properties of both derivatives and cash markets). Using daily data from 2005 to 2009, we find that
credit spread returns are primarily driven by innovations and to a lower extent by changes in the
expected loss component, the risk premium component, the liquidity premium component and the
inertial component whose relative importance changes over time. The intra-market dependence during
the current crisis decreases for bonds and ASP innovations but increases slightly for CDS. ASP and
bond innovations are closely related, suggesting that the cash component dominates the ASP
innovations’ behavior. On the other hand CDS’s innovations are unrelated with both the bonds’ and
the ASP’s innovations, suggesting that the derivatives element in the ASP contract (due to the implicit
interest rate swap) is essentially unrelated with the innovations in the pure credit derivative contract
(CDS).
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Credit spreads, Market dynamic dependence, DCC-GARCH
Bibliographic citation
SSRN working paper series (feb. 2012)