Title: Greek sovereign credit market dynamics: Credit Default Swap and bond spreads' linkages
Authors: Ioannis A. Tampakoudis; Demetres N. Subeniotis; Ioannis G. Kroustalis
Department of Marketing and Operations Management, University of Macedonia, Thessaloniki 540 06, Greece
Department of Business Administration, University of Macedonia, Thessaloniki 540 06, Greece
Department of Balkan, Slavic and Oriental Studies, University of Macedonia, Thessaloniki 540 06, Greece
Abstract: This study investigates the dynamic relationship between the Greek sovereign Credit Default Swap (CDS) and bond markets, using daily CDS and bond spreads from January 2006 to December 2010. We attempt to enlighten the conflicting conclusions of previous literature referring to sovereign credit market dynamics. The co-integration analysis suggests the existence of a long-run equilibrium relationship between the two markets. Concerning the short run, estimating a Vector Error Correction Model (VECM), we find that the bond market adjusts faster than the CDS market towards long run equilibrium. This result underlines the leading role of the Greek sovereign CDS market in the price discovery process.
Keywords: credit risk; debt crisis; bond spread; cointegration; price discovery; global markets; Greece; sovereign CDS; credit market dynamics: credit default swap; bond markets.
Int. J. of Trade and Global Markets, 2012 Vol.5, No.3/4, pp.268 - 280
Available online: 21 Oct 2012