The chicken or the egg? A note on the dynamic interrelation between government bond spreads and credit default swaps

Delis, Manthos D and Mylonidis, Nikolaos (2010): The chicken or the egg? A note on the dynamic interrelation between government bond spreads and credit default swaps.

Abstract

This note provides the first empirical assessment of the dynamic interrelation between government bond spreads and their associated credit default swaps (CDS). We use data for the Southern European countries (Greece, Italy, Portugal and Spain) that found themselves with a problematic public sector in the dawn of the recent financial distress. We find that CDS prices Granger-cause government bond spreads after the eruption of the 2007 subprime crisis. Feedback causality is detected during periods of financial and economic turmoil, thereby indicating that high risk aversion tends to perplex the transmission mechanism between CDS prices and government bond spreads.

• Item Type: MPRA Paper
• Language: English
• Keywords: Government bonds; Credit default swaps; Rolling Granger-causality tests
• Subjects: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems; G - Financial Economics > G0 - General > G01 - Financial Crises

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