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Price discovery of sovereign credit risk in the Euro zone

Perpignani, Kristofer and Meister, Markus (2010)
Department of Business Administration
Abstract
This paper compares credit pricing on the bond market and the credit default swap market with focus on countries of the Euro zone and in particular on Greece. For the period 2006 to 2008 we find that the two markets are closely related and that the CDS market is the main forum of price discovery. After 2008 the relationship loosened, however we find evidence that the bond market still is affected by the CDS market. Overall, the results of this paper suggest that the relationship between the two markets on sovereign level is similar to the rela- tionship on corporate level. However, in contrast with previous findings on corporate level, the German government bond is found to be the best proxy of the risk free rate when pricing the credit... (More)
This paper compares credit pricing on the bond market and the credit default swap market with focus on countries of the Euro zone and in particular on Greece. For the period 2006 to 2008 we find that the two markets are closely related and that the CDS market is the main forum of price discovery. After 2008 the relationship loosened, however we find evidence that the bond market still is affected by the CDS market. Overall, the results of this paper suggest that the relationship between the two markets on sovereign level is similar to the rela- tionship on corporate level. However, in contrast with previous findings on corporate level, the German government bond is found to be the best proxy of the risk free rate when pricing the credit risk of the analyzed countries. (Less)
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author
Perpignani, Kristofer and Meister, Markus
supervisor
organization
year
type
H1 - Master's Degree (One Year)
subject
keywords
Bond spread, credit default swap, cointegration, price discovery, Vector error correction model, Management of enterprises, Företagsledning, management
language
Swedish
id
2169611
date added to LUP
2010-06-04 00:00:00
date last changed
2012-04-02 18:15:44
@misc{2169611,
  abstract     = {This paper compares credit pricing on the bond market and the credit default swap market with focus on countries of the Euro zone and in particular on Greece. For the period 2006 to 2008 we find that the two markets are closely related and that the CDS market is the main forum of price discovery. After 2008 the relationship loosened, however we find evidence that the bond market still is affected by the CDS market. Overall, the results of this paper suggest that the relationship between the two markets on sovereign level is similar to the rela- tionship on corporate level. However, in contrast with previous findings on corporate level, the German government bond is found to be the best proxy of the risk free rate when pricing the credit risk of the analyzed countries.},
  author       = {Perpignani, Kristofer and Meister, Markus},
  keyword      = {Bond spread,credit default swap,cointegration,price discovery,Vector error correction model,Management of enterprises,Företagsledning, management},
  language     = {swe},
  note         = {Student Paper},
  title        = {Price discovery of sovereign credit risk in the Euro zone},
  year         = {2010},
}