Finanzas

American Finance Association

An Empirical Analysis of the Dynamic Relation between Investment-Grade Bonds and Credit Default Swaps Author(s): Roberto Blanco, Simon Brennan, Ian W. Marsh Source: The Journal of Finance, Vol. 60, No. 5 (Oct., 2005), pp. 2255-2281 Published by: Blackwell Publishing for the American Finance Association Stable URL: http://www.jstor.org/stable/3694748 . Accessed:21/03/2011 19:47
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THEJOURNAL FINANCE* VOL.LX,NO. 50 OCTOBER OF 2005

An Empirical Analysis of the Dynamic Relation between Investment-Grade Bonds and Credit Default Swaps
ROBERTOBLANCO,SIMON BRENNAN, and IAN W. MARSH* ABSTRACT
We test the theoretical equivalence of credit default swap (CDS) prices andcredit spreads derived by Duffle (1999), finding support for the parity relation as an equilibrium condition. We also find two forms of deviation from parity. First, for three firms, CDS prices are substantially higher than credit spreads for long periods of time, arising from combinations of imperfections in the contract specification of CDSs and measurement errors in computing the creditspread. Second, we find short-lived deviations from parity for all other companies due to a lead for CDS prices over credit spreads in the price discovery process.

CORPORATE SOVEREIGN AND BONDS among the most recent securities to are RISKY benefit from the trading of associated derivative contracts. This development has even drawn praise from Federal Reserve Chairman, Alan Greenspan, in a November19, 2002, speech before the Council on Foreign Relations. Despite only coming into existence in 1992, the British Bankers' Association (BBA) estimates the total gross notional value of outstanding credit derivatives (excluding asset swaps) to be U.S. $1.9 trillion at the end of 2002. The Office of the Comptroller of the Currency reports a 51.7% annual growth rate in the use of credit derivatives byU.S. banks till September 2003 and the BBA predicts that the total notional amount of credit derivatives will reach $4.8 trillion by the end of 2004 (BBA (2002)). To put this in perspective, the total notional amount
*Blanco is at the Banco de Espafia and was on secondment to the Bank of England while this paper was being written, Brennan is at the Bank of England, and Marsh is at Cass BusinessSchool, and the Cambridge Endowment for Research in Finance. He was on leave of absence at the Bank of England when this paper was being written. We would like to thank Bill Allen, Eva Catarineu, Gordon Gemmill, Charles Goodhart, Andrew Haldane, Simon Hayes, Kevin James, David Rule, Hyun Shin, Michela Vecchi, Geoffrey Wood, seminar participants at the Bank of England, Banco de Espafia, Western...