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An Empirical Analysis of the Dynamic Relation between Investment‐Grade Bonds and Credit Default Swaps
Author(s) -
BLANCO ROBERTO,
BRENNAN SIMON,
MARSH IAN W.
Publication year - 2005
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2005.00798.x
Subject(s) - credit default swap , itraxx , credit derivative , credit default swap index , econometrics , bond , economics , financial economics , price discovery , monetary economics , credit valuation adjustment , credit risk , actuarial science , futures contract , finance , credit reference
ABSTRACT We test the theoretical equivalence of credit default swap (CDS) prices and credit spreads derived by Duffie (1999), finding support for the parity relation as an equilibrium condition. We also find two forms of deviation from parity. First, for three firms, CDS prices are substantially higher than credit spreads for long periods of time, arising from combinations of imperfections in the contract specification of CDSs and measurement errors in computing the credit spread. Second, we find short‐lived deviations from parity for all other companies due to a lead for CDS prices over credit spreads in the price discovery process.