Economics, Econometrics and Finance
4 years ago

European corporate credit markets shaken by dynamic dependences during financial crisis.

Applied Financial Economics
An empirical analysis of dynamic dependences in the European corporate credit markets: bonds versus credit derivatives
Sergio Mayordomo, Juan Ignacio Peña

Paper Summary

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The article examines how European corporate credit spreads in bond, Credit Default Swap (CDS), and Asset Swap (ASP) markets are connected. The researchers analyzed data from 2005 to 2011 and found that credit spread changes are mainly driven by new developments. During the 2007-2009 financial crisis, the relationship between bond and ASP markets weakened, while CDS market dependence increased due to counterparty risk. However, after 2009, the markets started to return to pre-crisis levels. ASP and bond markets are closely linked, with bond market dominating ASP behavior. In contrast, CDS market changes are not related to bond or ASP market changes.