TY - JOUR

T1 - Liquidity spillovers in sovereign bond and CDS markets: An analysis of the Eurozone sovereign debt crisis

AU - Calice, G

AU - Chen, J

AU - Williams, J

PY - 2013/1

Y1 - 2013/1

N2 - 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. (C) 2011 Elsevier B.V. All rights reserved.

AB - 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. (C) 2011 Elsevier B.V. All rights reserved.

U2 - 10.1016/j.jebo.2011.10.013

DO - 10.1016/j.jebo.2011.10.013

M3 - Article

VL - 85

SP - 122

EP - 143

JO - Journal of Economic Behavior and Organization

JF - Journal of Economic Behavior and Organization

SN - 0167-2681

ER -