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

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journal contribution
posted on 24.02.2017 by Giovanni Calice, Jing Chen, Julian M. Williams
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. © 2011 Elsevier B.V.

History

School

  • Business and Economics

Department

  • Business

Published in

Journal of Economic Behavior and Organization

Volume

85

Issue

1

Pages

122 - 143

Citation

CALICE, G., CHEN, J. and WILLIAMS, J.M., 2013. Liquidity spillovers in sovereign bond and CDS markets: an analysis of the Eurozone sovereign debt crisis. Journal of Economic Behavior and Organization, 85 (1), pp.122-143

Publisher

© Elsevier

Version

SMUR (Submitted Manuscript Under Review)

Publisher statement

This work is made available according to the conditions of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International (CC BY-NC-ND 4.0) licence. Full details of this licence are available at: https://creativecommons.org/licenses/by-nc-nd/4.0/

Publication date

2013

ISSN

0167-2681

Language

en

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