Credit Spreads: An empirical Analysis on the Informational Content of Stocks, Bonds, and CDS Articles uri icon

publication date

  • November 2009

start page

  • 2013

end page

  • 2025

issue

  • 11

volume

  • 33

International Standard Serial Number (ISSN)

  • 0378-4266

Electronic International Standard Serial Number (EISSN)

  • 1872-6372

abstract

  • This paper explores the dynamic relationship between stock market implied credit spreads, CDS spreads, and bond spreads. A general VECM representation is proposed for changes in the three credit spread measures which accounts for zero, one, or two independent cointegration equations, depending on the evidence provided by any particular company. Empirical analysis on price discovery, based on a proprietary sample of North American and European firms, and tailored to the specific VECM at hand, indicates that stocks lead CDS and bonds more frequently than the other way round. It likewise confirms the leading role of CDS with respect to bonds.