Valuation differences between credit default swap and corporate bond markets

Oliver Entrop, Richard Schiemert and Marco Wilkens

Abstract

ABSTRACT

This paper quantifies and explains the valuation differences between credit default swaps (CDSs) and corporate bonds from a sample of European investment-grade firms. Based on all information gained through the calibration of a stochastic intensity credit model to the time series of the issuer's CDS curve, we define a new corporate-bond-specific measure of the valuation difference. Our results show that, on average, risk premiums implied in corporate bonds exceed those in CDS markets by a much smaller extent than found in previous studies. Using panel data analysis, we detect a cross-sectional influence of bond liquidity measures and find a significant impact of the general level of credit risk on the time series variation of the valuation difference.