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

Giovanni Calice, Jing Chen, Julian Williams

Research output: Contribution to journalArticle

37 Citations (Scopus)

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 spreads 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.
Original languageEnglish
Pages (from-to)122-143
Number of pages22
JournalJournal of Economic Behavior and Organization
Volume85
DOIs
Publication statusPublished - Jan 2013

Fingerprint

Sovereign bonds
Time-varying
Credit default swaps
Liquidity
Credit spreads
Euro zone
Default risk
Spillover
Sovereign debt crises
Bond yields
Ireland
Euro area
Credit
Liquidity risk
Vector autoregression
Interaction
Sovereign debt
Maturity
Complete markets
Portugal

Keywords

  • credit default swaps
  • liquidity
  • sovereign bonds
  • credit spreads

Cite this

Liquidity spillovers in sovereign bond and CDS markets : an analysis of the Eurozone sovereign debt crisis. / Calice, Giovanni; Chen, Jing; Williams, Julian.

In: Journal of Economic Behavior and Organization, Vol. 85, 01.2013, p. 122-143.

Research output: Contribution to journalArticle

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