Project Management

Credit Risk Price Discovery In Equity, Debt, And Credit Derivative Markets

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Executive Summary

Credit risk pricing is perhaps an understudied topic in comparisons to its profound impact on the United State's financial markets and economy. This paper uses established price discovery techniques to develop a method of price discovery for credit risk in three financial markets: equity, debt, and credit derivative. Using weekly JPMorgan data, they find that in the short-run the equity market and, to a lesser extent, credit derivative market led the bond market. In the long-run, equity, bond markets; credit derivative, bond markets are cointegrated, but no long run equilibrium credit risk pricing relationship existed between the equity and credit derivative markets.

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