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Liquidity spillovers in sovereign bond and CDS markets: An analysis of the Eurozone sovereign debt crisis

Giovanni Calice, Maggie Chen, Julian Williams

Journal of Economic Behavior & Organization, Volume: 85, Pages: 122 - 143

Swansea University Author: Maggie Chen

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DOI (Published version): 10.1016/j.jebo.2011.10.013

Abstract

At the end of 2009, countries in the Eurozone (euro area) began to experience a sudden divergence of bond yields as the market perception of sovereign default risk increased. The theory of complete markets suggests that sovereign debt and credit default swap (CDS) credit spreads should track each ot...

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Published in: Journal of Economic Behavior & Organization
ISSN: 0167-2681
Published: 2013
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URI: https://cronfa.swan.ac.uk/Record/cronfa6969
first_indexed 2013-07-23T11:56:56Z
last_indexed 2018-02-09T04:34:39Z
id cronfa6969
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spelling 2013-11-05T11:36:05.7194786 v2 6969 2012-01-30 Liquidity spillovers in sovereign bond and CDS markets: An analysis of the Eurozone sovereign debt crisis 84886845de6e6c3a4d460fc5e68ac18e Maggie Chen Maggie Chen true false 2012-01-30 CBAE At the end of 2009, countries in the Eurozone (euro area) began to experience a sudden divergence of bond yields as the market perception of sovereign default risk increased. The theory of complete markets suggests that sovereign debt and credit default swap (CDS) credit spreads should track each other closely. In addition, liquidity risk should be priced into both instruments in such a way that buying exposure to the same default risk is identically priced. We use a time-varying vector autoregression framework to establish the credit and liquidity spreads interactions over the 2009-2010 crisis period. We nd substantial variation in the patterns of the transmission effect between maturities and across countries. Our major result is that for several countries, including Greece, Ireland and Portugal the liquidity of the sovereign CDS market has a substantial time varying inuence on sovereign bond credit spreads. This evidence is of particular importance in the current policy context. Journal Article Journal of Economic Behavior & Organization 85 122 143 0167-2681 31 12 2013 2013-12-31 10.1016/j.jebo.2011.10.013 COLLEGE NANME Management School COLLEGE CODE CBAE Swansea University 2013-11-05T11:36:05.7194786 2012-01-30T14:15:47.5230000 Faculty of Humanities and Social Sciences School of Management - Accounting and Finance Giovanni Calice 1 Maggie Chen 2 Julian Williams 3
title Liquidity spillovers in sovereign bond and CDS markets: An analysis of the Eurozone sovereign debt crisis
spellingShingle Liquidity spillovers in sovereign bond and CDS markets: An analysis of the Eurozone sovereign debt crisis
Maggie Chen
title_short Liquidity spillovers in sovereign bond and CDS markets: An analysis of the Eurozone sovereign debt crisis
title_full Liquidity spillovers in sovereign bond and CDS markets: An analysis of the Eurozone sovereign debt crisis
title_fullStr Liquidity spillovers in sovereign bond and CDS markets: An analysis of the Eurozone sovereign debt crisis
title_full_unstemmed Liquidity spillovers in sovereign bond and CDS markets: An analysis of the Eurozone sovereign debt crisis
title_sort Liquidity spillovers in sovereign bond and CDS markets: An analysis of the Eurozone sovereign debt crisis
author_id_str_mv 84886845de6e6c3a4d460fc5e68ac18e
author_id_fullname_str_mv 84886845de6e6c3a4d460fc5e68ac18e_***_Maggie Chen
author Maggie Chen
author2 Giovanni Calice
Maggie Chen
Julian Williams
format Journal article
container_title Journal of Economic Behavior & Organization
container_volume 85
container_start_page 122
publishDate 2013
institution Swansea University
issn 0167-2681
doi_str_mv 10.1016/j.jebo.2011.10.013
college_str Faculty of Humanities and Social Sciences
hierarchytype
hierarchy_top_id facultyofhumanitiesandsocialsciences
hierarchy_top_title Faculty of Humanities and Social Sciences
hierarchy_parent_id facultyofhumanitiesandsocialsciences
hierarchy_parent_title Faculty of Humanities and Social Sciences
department_str School of Management - Accounting and Finance{{{_:::_}}}Faculty of Humanities and Social Sciences{{{_:::_}}}School of Management - Accounting and Finance
document_store_str 0
active_str 0
description At the end of 2009, countries in the Eurozone (euro area) began to experience a sudden divergence of bond yields as the market perception of sovereign default risk increased. The theory of complete markets suggests that sovereign debt and credit default swap (CDS) credit spreads should track each other closely. In addition, liquidity risk should be priced into both instruments in such a way that buying exposure to the same default risk is identically priced. We use a time-varying vector autoregression framework to establish the credit and liquidity spreads interactions over the 2009-2010 crisis period. We nd substantial variation in the patterns of the transmission effect between maturities and across countries. Our major result is that for several countries, including Greece, Ireland and Portugal the liquidity of the sovereign CDS market has a substantial time varying inuence on sovereign bond credit spreads. This evidence is of particular importance in the current policy context.
published_date 2013-12-31T18:13:48Z
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score 11.04748

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