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Title: Liquidity spillovers in sovereign bond and CDS markets: an analysis of the Eurozone sovereign debt crisis
Authors: Calice, Giovanni
Chen, Jing
Williams, Julian M.
Issue Date: 2013
Publisher: © Elsevier
Citation: CALICE, G., CHEN, J. and WILLIAMS, J.M., 2013. Liquidity spillovers in sovereign bond and CDS markets: an analysis of the Eurozone sovereign debt crisis. Journal of Economic Behavior and Organization, 85 (1), pp.122-143
Abstract: At the end of 2009, countries in the Eurozone (euro area) began to experience a sudden divergence of bond yields as the market perception of sovereign default risk increased. The theory of complete markets suggests that sovereign debt and credit default swap (CDS) credit spreads should track each other closely. In addition, liquidity risk should be priced into both instruments in such a way that buying exposure to the same default risk is identically priced. We use a time-varying vector autoregression framework to establish the credit and liquidity spread interactions over the 2009-2010 crisis period. We find substantial variation in the patterns of the transmission effect between maturities and across countries. Our major result is that, for several countries, including Greece, Ireland and Portugal the liquidity of the sovereign CDS market has a substantial time varying influence on sovereign bond credit spreads. This evidence is of particular importance in the current policy context. © 2011 Elsevier B.V.
Version: Submitted for publication
DOI: 10.1016/j.jebo.2011.10.013
URI: https://dspace.lboro.ac.uk/2134/24212
Publisher Link: http://dx.doi.org/10.1016/j.jebo.2011.10.013
ISSN: 0167-2681
Appears in Collections:Published Articles (Business School)

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