An Empirical Analysis of the Dynamic Relation between Investment‐Grade Bonds and Credit Default Swaps
Top Cited Papers
- 16 September 2005
- journal article
- Published by Wiley in The Journal of Finance
- Vol. 60 (5) , 2255-2281
- https://doi.org/10.1111/j.1540-6261.2005.00798.x
Abstract
We test the theoretical equivalence of credit default swap (CDS) prices and credit spreads derived by Duffie (1999), finding support for the parity relation as an equilibrium condition. We also find two forms of deviation from parity. First, for three firms, CDS prices are substantially higher than credit spreads for long periods of time, arising from combinations of imperfections in the contract specification of CDSs and measurement errors in computing the credit spread. Second, we find short‐lived deviations from parity for all other companies due to a lead for CDS prices over credit spreads in the price discovery process.Keywords
All Related Versions
This publication has 28 references indexed in Scilit:
- Some desiderata for the measurement of price discovery across marketsJournal of Financial Markets, 2002
- International Market Implications of Declining Treasury DebtJournal of Money, Credit and Banking, 2002
- Exploring for the Determinants of Credit Risk in Credit Default Swap Transaction DataSSRN Electronic Journal, 2001
- Valuing Credit Default Swaps IIThe Journal of Derivatives, 2001
- An Empirical Study of Bond Market TransactionsCFA Magazine, 2000
- Credit Swap ValuationCFA Magazine, 1999
- The Declining Credit Quality of U.S. Corporate Debt: Myth or Reality?The Journal of Finance, 1998
- Pricing Derivatives on Financial Securities Subject to Credit RiskThe Journal of Finance, 1995
- Credit Risk DerivativesThe Journal of Derivatives, 1995
- Cointegration: how short is the long run?Journal of International Money and Finance, 1991