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Title: Essays on emerging market sovereign credit risk and the sovereign credit default swap market
Author: Klimaviciene, Asta
ISNI:       0000 0004 2669 8582
Awarding Body: University of Manchester
Current Institution: University of Manchester
Date of Award: 2009
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This thesis consists of three essays that examine the information content of sovereign credit default swap (CDS) prices in the context of credit risk pricing in emerging markets. In particular, its focus is in two areas: (i) the relationship between sovereign CDS and bond markets, and (ii) the impact of credit rating announcements on sovereign CDS and bond prices. The first essay examines the information transmission and price discovery process in sovereign CDS and bond markets. It assumes the existence of an arbitrage relationship between CDS and underlying bond instruments, and employs the vectorerror correction model (VECM) for cointegrated markets. Results suggest that over the sample period considered (2003-2006), the bond market appears to informationally dominate the CDS market. This finding is in contrast to studies examining corporate credit risk markets. However, the essay documents that the CDS market's contribution increases substantially when weekly as opposed to daily data is utilized, indicating that potential asynchronous data timing issues have an impact upon the results. In the second essay, the focus is on a dynamic aspect of the price discovery process in sovereign CDS and bond markets. Extant studies of credit risk markets assume that the parameters governing the information transmission process are constant. I employ a number of econometric methods in testing for possible variations in price discovery process, including structural break tests, smooth transition models, dummy variable analysis, and other extensions of the VECM. The information transmission is found to be dependent on the short-term behaviour of credit spreads, and correlated with the liquidity of the CDS market. Results suggest an increasing importance of the CDS market relative to the bond market in the price discovery process over the sample period. The third essay analyses the price impact of sovereign credit rating announcements on sovereign credit risk markets. It employs an event study framework to examine whether there is: an anticipation of the forthcoming announcement in sovereign CDS and bond prices; a price impact on the announcement day; and a delayed reaction. The essay documents an asymmetrical reaction: the price impact of negative events is more significant. Results suggest that the price impact in CDS and bond markets differs, and depends on the event type and the credit quality of the sovereign entity.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available