English (United Kingdom)

https://curated-unify.zendy.io/wp-json/zendy-region/v1/featured_content/oa?rat=en

https://curated-unify.zendy.io/wp-json/zendy-region/v1/highlighted_journal/

Zendy Plus

Presents the access of premium content as premium feature

Premium Content

Presents the keyphrase highlighting as premium feature

Keyphrase Highlighting

Presents the summarisation as premium feature

Summarisation

Insights

Presents the pdf analysis as premium feature

PDF Analysis

Presents the zaia usage as premium feature

ZAIA

Zendy Tools

Zendy Open

We examine the relationships between credit default swap (CDS) premiums and bond yield spreads for nine emerging market sovereign borrowers. We find that these two measures of credit risk deviate considerably in the short run, due to factors such as liquidity and contract specifications, but we estimate a stable long-term equilibrium relationship for most countries. In particular, CDS premiums tend to move more than one-for-one with yield spreads, which we show is broadly consistent with the presence of a significant "cheapest-to-deliver" (CTD) option. In addition, we find a variety of cross-sectional evidence of a CTD option being incorporated into CDS premiums. In our analysis of the short-term dynamics, we find that CDS premiums often move ahead of the bond market. However, we also find that bond spreads lead CDS premiums for emerging market sovereigns more often than has been found for investment-grade corporate credits, consistent with the CTD option impeding CDS liquidity for our riskier set of borrowers. Furthermore, the CDS market is less likely to lead for sovereigns that have issued more bonds, suggesting that the relative liquidity of the two markets is a key determinant of where price discovery occurs.

Sovereign CDS and Bond Pricing Dynamics in Emerging Markets: Does the Cheapest-to-Deliver Option Matter?