Sovereign CDS and bond pricing dynamics in emerging markets: Does the cheapest-to-deliver option matter?
By John Ammer, F. Cai. 2011
142 citations recorded by the source corpus.
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.
Subfields: Finance
View Paper: https://www.semanticscholar.org/paper/7b974804018e168a4343ba80453d17f15a3b091d
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Citations in the corpus
- Has the CDS Market Influenced the Borrowing Cost of European Countries During the Sovereign Crisis (2012, unknown): “In order to assess emerging sovereign spreads' dynamics, several studies which investigate emerging sovereign spreads (see McGuire and Schrilvers (2003), Sy (2001), Sy (2003), Hartelius and Kodres (2008) and Hilscher and Nosbrusch (2010)) or the relationship between emerging sovereign CDS premia and”
- Credit-Risk Valuation in the Sovereign CDS and Bonds Markets: Evidence from the Euro Area Crisis (2013, unknown): “For instance, Ammer and Cai (2007) find that bond spreads lead CDS premia more often than what had been found for investment-grade corporate credits.”
- Credit Default Swaps: A Survey (2014, methodology): “The differential liquidity argument for price discovery is also brought to the fore by Ammer and Cai [2011], who show that CDS price leadership correlates positively with the bond-to-CDS ratio of bid-ask spreads, and negatively with the number of bonds outstanding. Coudert and Gex [2013] confirm the”