A Case for Europe: the Relationship between Sovereign CDS and Stock Indexes

Coronado, María; Corzo, Teresa; Lazcano, Laura
October 2012
Frontiers in Finance & Economics;Oct2012, Vol. 9 Issue 2, p32
Academic Journal
In 2010 we witnessed a major European sovereign debt crisis. By examining the links between sovereign Credit Default Swaps and stock indexes for eight European countries during the period 2007-2010, this paper studies the lead-lag relationships of the two markets which represent a country's credit and market risk. Through the use of a Vector Autoregressive model and a panel data model we find that the stock market plays a leading role during the sample period, but when 2010 is isolated a change in this relationship appears: a key role of sovereign CDS markets - the incorporation of new information - emerges. This phenomenon is most significant in countries with high risk spread.


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