Sovereign CDS And Bond Pricing Dynamics In Emerging Markets: Does The Cheapest-to-Deliver Option Matter?
Source: University of Pennsylvania
The authors examine the relationships between Credit Default Swap (CDS) premiums and bond yield spreads for nine emerging market sovereign borrowers. They find that these two measures of credit risk deviate considerably in the short run, due to factors such as liquidity and contract specifications, but they 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 they show is broadly consistent with the presence of a significant "Cheapest-To-Deliver" (CTD) option. In addition, they find a variety of cross-sectional evidence of a CTD option being incorporated into CDS premiums.
| Format: | Size: | 373.95 | |
| Date: | Mar 2008 |
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