The Relationship between Sovereign Credit Default Swaps and Sovereign Bond Market : Sovereign Crises Context

Recent studies suggested that financial markets correlations and volatilities change during crisis periods. This paper presents a practical framework to test the volatility of sovereign credit default market and sovereign bond market indexes during the sovereign crisis period. Furthermore, our research tests the dynamic relationship between the sovereign CDS market evolution and the sovereign bond market, based on a sample of 10 developed Eurozone countries. Then, we integrate the bond debt's sensitivity presented by its maturity, which is a line of research supported by previous studies. Our results show that both markets are sensitive to internal shocks. Moreover, the dynamic relationship between the two markets is more sensitive to negative information than positive information. Finally, maturity significantly affects the sensitivity of sovereign bonds to CDS market evolution.This study contributes to the empirical literature by presenting, to the best of our knowledge, an unprecedented empirical investigation of the sovereign bond maturity effect's sensitivity to the sovereign CDS market evolution