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

Calice, Giovanni, Chen, Jing and Williams, Julian 2013. Liquidity spillovers in sovereign bond and CDS markets: An analysis of the Eurozone sovereign debt crisis. Journal of Economic Behavior & Organization 85 , pp. 122-143. 10.1016/j.jebo.2011.10.013

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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 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 spread interactions over the 2009–2010 crisis period. We find 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 influence on sovereign bond credit spreads. This evidence is of particular importance in the current policy context.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Mathematics
Additional Information: Available online 26 October 2011
Publisher: Elsevier
ISSN: 0167-2681
Date of Acceptance: 13 October 2011
Last Modified: 09 Sep 2019 14:35
URI: http://orca.cf.ac.uk/id/eprint/77913

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