Price discovery in the markets for credit risk: A Markov switching approach

Arbeitspapier

We examine price discovery in the Credit Default Swap and corporate bond market. By using a Markov switching framework we are able to analyze the dynamic behavior of the information shares during tranquil and crisis periods. The results show that price discovery takes place mostly on the CDS market. The importance of the CDS market even increases during the more volatile crisis periods. According to a cross sectional analysis liquidity is the main determinant of a market's contribution to price discovery. During the crisis period, however, we also find a positive link between leverage and CDS market information shares. Overall the results indicate that price discovery measures and their determinants change during tranquil and crisis periods, which emphasizes the importance of more exible frameworks, such as Markov switching models.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SFB 649 Discussion Paper ; No. 2015-035

Classification and Topics

• Classification: Wirtschaft ; Semiparametric and Nonparametric Methods: General ; International Financial Markets
• Subject: Markov switching model ; price discovery ; credit risk ; CDS

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Dimpfl, Thomas Ernst Herbert ; Peter, Franziska Julia
• Event: Veröffentlichung
• (who): Humboldt University of Berlin, Collaborative Research Center 649 - Economic Risk
• (where): Berlin
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/122015
• Last update: 10.03.2025, 11:45 AM CET