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Credit-riskvaluationin
the sovereignCDSandbonds
markets: Evidencefrom
the euroarea crisis
Óscar Arce
Sergio Mayordomo
Juan Ignacio Peña
Documentos de Trabajo
N
o
53
CNMV Credit-riskvaluationinthesovereignCDSandbondsmarkets:Evidencefromtheeuroarea crisis
[...]... according to the following process: ∆vt = µt θ + σ t λ zt (1) Credit-riskvaluationinthesovereignCDSandbondsmarkets:Evidencefromtheeuroareacrisis 21 for t = 0, 1, 2, …, n, with n denoting the last investment date and zt innovations We assume the following initial conditions: z0 = 0 and v0 = 0 (i.e., the strategy is self-financed) Parameters θ and λ determine whether the expected trading... funding costs, differences in liquidity across markets, and counterparty risk inthe CDS market Inthe following section we test for the significance of these (and other) factors as potential explanatory variables for the cases of non-zero basis detected during thecrisisCredit-riskvaluationinthesovereignCDSandbondsmarkets:Evidencefromtheeuroareacrisis 23 Statistical arbitrage test for the. .. factors inthe context of the recent European sovereign debt crisisCredit-riskvaluationinthesovereignCDSandbondsmarkets:Evidencefromtheeuroareacrisis 15 3 Data The data consists of daily 5-year sovereign bond yields andCDS spreads for eleven EMU countries (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, The Netherlands, Portugal, and Spain) from January 2004 to October... reports theCDSand bond spreads main descriptive statistics (mean and standard deviation) for different time periods (2004-2008, 2009, 2010, and 2011) The bond spreads are obtained as the difference between country A’s yield andthe German yield Credit-riskvaluationinthesovereignCDSandbondsmarkets:Evidencefromtheeuroareacrisis 19 4 Are there persistent deviations between CDSand bond... the first difference of such spreads at time t.10 Finally, ut denotes a white noise vector 10 The optimal number of lags is determined by the Schwarz information criteria Credit-riskvaluation in the sovereign CDSandbondsmarkets:Evidencefromtheeuroareacrisis 29 The price-discovery metric for the bond andCDS markets, denoted by GGbond and GGCDS, respectively, can then be constructed from the. .. both inthe pre -crisis andthecrisis periods There is extensive literature addressing the determinants of corporate bond andCDS spreads.3 Although this type of analysis is less frequent inthe case of sovereign references, this topic is attracting increasing attention since the inception of the EMU.4 Our aim, however, is not to study the determinants of theCDS or the bond spread, but, rather, the. .. asset, as in, e.g., Geyer et al (2004), Bernoth et al (2006), Delis and Mylonidis (2010), Favero et al (2010), Foley-Fisher (2010), and Palladini and Portes (2011), among others Credit-riskvaluation in the sovereign CDSandbondsmarkets:Evidencefromtheeuroareacrisis 11 First, we test the “no-arbitrage” theoretical frictionless relation that equates the bond andtheCDS spreads We find that there... corresponding to the last months of 2010 andthe months of 2011 included inthe sample, the basis behaves like a non-stationary variable For this reason, instead of analysing the determinants of the basis we study the determinants of the relative basis, defined as the difference between theCDSand bond spreads relative to the average credit spread, which is obtained as the simple mean of theCDSand the. .. sign for the bond spread in Finland in 2010 is due to the fact that the average yield of the Finnish bond was lower than for the German bond Credit-riskvaluation in the sovereign CDSandbondsmarkets:Evidencefromtheeuroareacrisis 17 CDSand bond spreads descriptive statistics TABLE 1 Bond 2004-2008 2009 Austria 2010 2011 2004-2008 2009 Belgium 2010 2011 2004-2008 2009 Finland 2010 2011 2004-2008... since the outset of the crisis, the bond market has had a predominant role in price discovery in Germany, France, the Netherlands, Austria, and Belgium, while theCDS market is playing a major role in Italy, Ireland, Spain, Greece, and Portugal Palladini and Portes (2011) use data on six euro- area countries (Austria, Belgium, Greece, Ireland, Italy, and Portugal) over the period 2004-2011 They find that . Dev. 506 1,452
Credit-risk valuation in the sovereign CDS and bonds markets: Evidence from the euro area crisis 19
Bond CDS
The Netherlands
2004-2008
Mean. others.
Credit-risk valuation in the sovereign CDS and bonds markets: Evidence from the euro area crisis 15
Spain) during the period July 2004 to May 2010 on the basis