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Did the CDS market push up risk premia for sovereign credit?


We examine the empirical relationship between credit default swap (CDS) premia and government bond spreads for Portugal, Italy, Ireland, Greece, and Spain (the ‘PIIGS’ countries). We find some evidence for a long-run relationship in the sense of cointegration for the two markets. In most cases (five out of seven), only CDS premia contribute to the price discovery process. In the other cases, both markets make a more or less equal contribution. All in all, this suggests that bond spreads react only sluggishly to long-term imbalances, as measured by the cointegrating relationship. In light of this, we can conclude that, in most cases, CDS markets are leading markets if there is a long-run relationship between the CDS and government bond spread markets. This may partly be due to liquidity effects.


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Correspondence to Sergio Andenmatten.

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writing his doctoral thesis at the University of Bern and works for the Swiss National Bank.

writing his doctoral thesis at the University of Bern and works for Wellershoff & Partners.

The authors would like to thank Klaus Neusser, the participants of the brown-bag seminar of the Department of Economics at the University of Bern, and the anonymous referee for their valuable comments. The content of the publication is the sole responsibility of the authors and does not necessarily reflect the views of the Swiss National Bank or Wellershoff & Partners.

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Andenmatten, S., Brill, F. Did the CDS market push up risk premia for sovereign credit?. Swiss J Economics Statistics 147, 275–302 (2011).

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