Credit Spreads: An Empirical Analysis on the Informational Content of Stocks, Bonds, and CDS

By Santiago Forte, J. Peña. 2009

329 citations recorded by the source corpus.

This paper explores the dynamic relationship between stock market implied credit spreads, CDS spreads, and bond spreads. A general VECM representation is proposed for changes in the three credit spread measures which accounts for zero, one, or two independent cointegration equations, depending on the evidence provided by any particular company. Empirical analysis on price discovery, based on a proprietary sample of North American and European firms, and tailored to the specific VECM at hand, indicates that stocks lead CDS and bonds more frequently than the other way round. It likewise confirms the leading role of CDS with respect to bonds.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/0da1a641f5119a93245949e0eae852b0e62a61c3

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

In Finance

Citations in the corpus

Credit Default Swaps: A Survey (2014, background): “11Forte and Pena [2009] explore the price discovery process for the stock, CDS and bond markets simultaneously, in a sample of 17 North American and European non-financial firms, during the period September 2001 to June 2003. They find that stock returns lead CDS spreads and bond yields more frequen”
Assessing the systemic risk of a heterogeneous portfolio of banks during the recent financial crisis (2009, neutral): “See Blanco, Brennan, and March (2005), Forte and Peña (2009) and Norden and Wagner (2008), among others.”
Did CDS Trading Improve the Market for Corporate Bonds (2014, neutral): “Forte and Pena (2009) study the long run equilibrium relationships between bond, CDS and stock market implied spreads, and find that stocks lead CDS and bonds more frequently than the reverse, and the CDS market leads the bond market.”
Credit Spread Interdependencies of European States and Banks During the Financial Crisis (2012, neutral): “Prior to the econometric analysis, we log-transform the CDS levels as suggested by Forte and Pena (2009).”
Market discipline of banks: Why are yield spreads on bank-issued subordinated notes and debentures not sensitive to bank risks? (2011, background): “…and Downing (2007) find that default risk is a more important determinant of yield spreads than liquidity risk even in very short-term commercial paper that is inherently liquid, although Forte and Peña (2009) show that bond markets lag stock and credit default swap markets in price discovery.”
Corporate Bond Credit Spreads and Forecast Dispersion (2010, neutral): “Instead of quarterly credit spreads, we now turn to monthly bond returns from period t to t þ 1, which we compute as in Gebhardt et al. (2005): rtþ1 1⁄4 1⁄2ðPtþ1 þ AItþ1Þ þ Ctþ1 ðPtþ AItÞ =ðPt þ AItÞ , where Pt denotes the quoted bond price at time t; AIt is accrued interest which equals the coupon ”
Volatility spillovers across global asset classes: Evidence from time and frequency domains (2018, background): “, 2016), patterns of market integration and market efficiency (Bekaert and Harvey, 2003; Bartram et al., 2007; Forte and Peña, 2009), degree of contagion or spillovers (Bae et al.”
What Do Price Discovery Metrics Really Measure (2013, background): “…2012), options compared to futures (e.g., Booth et al., 1999; Hsieh et al., 2008; and Chen and Chung, 2012), CDS compared to bonds and stocks (e.g., Forte and Pena, 2009), screen-based compared to open-outcry (floor) trading (e.g., Ates and Wang, 2005), different contract maturities (e.g., Fricke…”
A framework for assessing the systemic risk of major financial institutions (2009, background): “We first illustrate the calculation of the indicator of systemic risk of the banking system during the sample period, then assess its vulnerabilities to extreme shocks in the stress testing exercise.”
News announcements and price discovery in foreign exchange spot and futures markets (2010, background): “Forte and Peña (2009) adopt both approaches of information share and common factor component weight to examine the price discovery among the stock, bond, and credit default swap markets.”
Systemic Risk Measures: The Simpler the Better? (2013, result): “Although there are some encouraging results in this line as documented in Forte and Peña (2009) and in Liao, Chen and Lu (2009), much more work is needed before this approach can be relied upon by policymakers.”