Naslov (eng)

Do the stock and CDS markets price credit risk equally in the long-run?

Autor

Lovreta, Lidija
Mladenović, Zorica

Opis (eng)

Abstract: In this paper, we examine the existence and stability of the long-run equilibrium relation between the price of credit risk in the stock and CDS markets for a sample of non-financial iTraxx Europe companies during the 2004–2017 period. We show that standard cointegration tests with no breaks frequently fail to detect cointegration. Once we formally account for the breaks in the cointegrating vector, we are able to detect cointegration over the entire sample period for the vast majority of the companies considered. An application of these results to CDS-equity trading shows that the profitability of traditional trading strategies crucially depends on the presence of cointegration and on the stability of the cointegrating vector. Finally, we find that CDS illiquidity factors decrease the likelihood of the stock and CDS market cointegration.

Opis (eng)

We thank Chris Adcock (the Editor), two anonymous referees, Stefano Bonini, Julio Carmona, Antonio Diaz, Santiago Forte, Lawrence Kryzanowski, Kata Váradi, as well as participants of the IFABS 2016 Barcelona Conference, the 24th Finance Forum, the 25th Annual MFS Conference, and the EFMA 2018 Annual Meetings for valuable comments and suggestions. Lidija Lovreta acknowledges financial support from the Spanish Ministry of Economy and Competitiveness (grant ECO2012-32554). Zorica Mladenović acknowledges financial support from the Serbian Ministry of Science and Technology (grants 179005 and 179062). The first version of this paper (which circulated under the title ‘Structural Breaks in the Long-run Equilibrium between the Stock and CDS Markets’) was written while Lidija Lovreta was visiting professor at Universitat Autònoma de Barcelona (UAB). The usual disclaimers apply.

Jezik

engleski

Datum

2018

Licenca

© All rights reserved

Predmet

Keywords: Credit default swaps; structural breaks; cointegration

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Ekonomski fakultet