An Empirical Investigation of Emerging Markets: What Does the Dynamics of Credit Risk Tell Us?

Alessandro Carboni and Andrea Carboni This Draft: November 21, 2010

Abstract This paper looks into credit risk markets for Emerging economies. It analyzes the relation between credit default swap (CDS) and bond spreads in the post Lehman Brothers period by focusing on both short and long run relations. Equity and cost of funding are also considered in the study. On the one hand, the CDS market is able to forecast the bond market in 11 cases out of 15, while equity is a useful predictor of the CDS market in 8 cases out of 15. Evidence of a bidirectional relation holds for Asian countries. On the other, the CDS market moves ahead of the bond market and is the leader in terms of price discovery of credit risk. Adding equity and cost of funding to our VECM does improve the number of cases where cointegration holds, but does not change the price discovery results.

Corresponding author: andreacarbo123@gmail.com.

Introduction

Credit risk indicators have received much attention during the nancial crisis beginning in the summer of 2007. The bailout of Lehman Brothers (15th September 2008) has shown the importance of nancial markets liquidity and has demonstrated that risk management is a dangerous factor in every economy. During the crisis OTC credit derivatives were under attack because they were indicated as the main contributors to the widespread turmoil, driving to a new kind of dimension, namely counterparty credit risk. From here, the need to provide more information through the creation of trade reporting for regulation authorities, as suggested for example by Banque de France (2010) and IFSL (2009), as well as to understand what is the best credit risk indicator, while best stands for more informative. During 2010, country risk crisis has evidenced the need to indicate if sovereign CDS is linked to corporate sector CDS and if CDS market volumes could aect sovereign CDS spreads. In this last case, there could happen speculative behaviors with the aim to increase spreads, aecting market perception of country risk assessment. However, Due (2010a, 2010b) and Citigroup (2010) suggest that CDS traders are not able to push corporate and sovereign entities to default, given the small size of the CDS market, relative to bond markets. Moreover, Carmassi and Micossi (2010) demonstrate that sovereign bond spreads react to signicant bad news from European leaders. The empirical literature on econometric properties among sovereign credit risk indicators is concentrated on detecting what is the leading market for credit risk. Contributions oered by Aktung et al. (2009), Ammer and Cai (2007) and more recently by Coudert and Gex (2010), among others, indicate that the CDS market seems to lead the bond market in price discovery, even if the liquidity of every market is essential for the leading property, especially before 2007. Moreover, the rst paper shows that results change according to dierent information criteria, while the second that the cheapest-to-deliver option is an important determinant of the basis. The third paper, through a panel analysis, demonstrates that in both emerging markets and riskiest countries (like PIIGS) the CDS market is the leader, while for safest countries (like for example France and Netherlands) the bond market leads in terms of price discovery. For the corporate sector, Blanco et al. (2004) and Zhu (2004), among others, try to check for the presence of cointegration in search of the validity of the no-arbitrage relations between CDS and bond spreads (i.e. the dierence between a bond return and the swap curve), during dierent periods and for dierent entities. Crouch and Marsh (2005) and De Wit (2006) deal with the relation between CDS spread and asset swap spread by using both corporate and sovereign entities showing both empirical results and theoretical issues, while another strand of the literature (Chan-Lau and Kim, 2005, Norden and Weber, 2009 and Longsta et al., 2003, among others) is dedicated to the dynamic analysis among CDS spreads, bond spreads and equity market returns. Moreover Bystrm (2005), Ehlers et al. o (2010) and Fung et al. (2008) measures the extent to which iTraxx and equity markets are related. Irrespective of the relations considered, all papers show that credit risk indicators price 2

equally in the long run for the most part of the entities, highlighting on the importance of CDS market information ows for price discovery of credit risk. On the other hand, Forte and Pea (2007) show that stock market leads credit risk markets expressed by CDS and n bond spreads. To the best of our knowledge, the relation between sovereign and corporate sector is only oered in a technical document provided by Credit Suisse (2010), where they analyze, on a descriptive basis, the relation between an index of sovereign CDS, like the SovX Western Europe, and a corporate index, like iTraxx Europe or the iTraxx Senior Financial. Moreover, they take a step ahead and try to price sovereign default risk into corporate credit spreads. As suggested by Ballie et al. (2002), when the same asset (i.e. credit risk in our case) is traded in dierent markets, its price is discovered by news presented in one or more of these markets. Together with Blanco et al. (2004), they argue that the appropriate method to investigate price discovery is not clear, but there are two popular common factor models that can be used: the rst one is the method developed by Hasbrouck (1995), while the second was developed by Gonzalo and Granger (1995). Both models are related on VECM specications, but they dier for at least two points.1 For the rst, Hasboruck (1995) decomposes the implicit price variance, with the assumption that price volatility reects the ows of information. On the other, Gonzalo and Granger ignore the correlation among markets and consider that the market that adjusts least to price movements in the other markets is the leading one. For the second, the two indicators oer similar results when the markets are aected by the same information ows. On the other hand, when residuals are correlated, Hasbroucks model can produce an ecient estimate of the contribution to price discovery only when the average of its bounds are considered, while the Gonzalo and Granger measure is ecient. However, Baillie et al. (2002) conclude providing that there is not a better measure of price discovery, because it depends on its denition, according either to the error correction phenomenon or to the correlations among markets innovations. They suggest the use of the Hasbrouck measure because it has a more general economic appeal and interpretation. Blanco et al. (2004) report both measures, while Zhu (2004) computes only Gonzalo-Granger measure because of residual autocorrelation. In this paper we focus our attention on Emerging markets: we study the dynamic properties among dierent credit risk indicators by using both CDS and bond spreads after the Lehman Brothers collapse. Our aim is to detect if there exists a market which anticipates other markets in incorporating credit risk information. We also investigate the role of equity and cost of funding in both short and long term connections among credit risk indicators. We concentrate on equity to inspect about predictive power and price discovery; on the other hand, we are interested in the cost of funding because of its importance during the recent nancial turmoil, especially after September 2008. The paper is structured as
The Volume 5, issue 3 of the Journal of Financial Markets (2002) contains several contributions for price discovery.
1

follows: Section 2 describes the credit risk indicators used in our analysis and shows the noarbitrage relationship. Section 3 deals with econometric analysis, introducing theoretical tools and treats data selection. Section 4 provides the results, while Section 5 concludes. An Appendix with gures and tables is oered at the end.

2
2.1

Credit Default Swap and Bond Spreads: Denition and No-Arbitrage Relation
Denition

CDS are the most common type of credit derivatives. A CDS is a bilateral contract that provides protection on the par value of a specied reference asset, with the protection buyer that pays a periodic fee (spread) or a one-o premium (set as a percentage amount of the protection bought) to a protection seller, while the protection seller makes the payment when a credit event occurs during the life of the contract. According to ISDA (2003) and Credit Suisse (2010), credit events for Governmental authorities can be classied in: 1) Repudiation / Moratorium and/or 2) Restructuring. Hence, a CDS can be viewed as an insurance contract against a risky event on a reference entity. In this case, there is the settlement payment made by the seller according to the contract settlement option. Credit derivatives specify physical or cash settlement.2 In the physical settlement, on occurrence of a credit event, the buyer delivers the reference asset to the seller, in return for which the seller pays for the face value of the delivered asset to the buyer (Choudry 2006). The contract may specify a number of alternative assets (called deliverable obligations) that the buyer can deliver.3 When more than one deliverable obligation is specied, the buyer will invariably deliver the cheapest asset on the list of eligible assets: this provides the concept of cheapest-to-deliver option, which is an embedded option aorded by the protection buyer.4 On the other hand, in the cash settlement option, the contract species a predetermined payout value when a credit event occurs. Generally, the protection seller pays the buyer the dierence between the nominal amount of the default swap and the nal (market) value of the reference asset, determined by means of a poll of dealer banks. This last value can be viewed as the recovery value of the asset.5 The CDS spread is the spread which determines the cash ows paid by the buyer of the contract. In this sense, the spread is the compensation for taking the risk of incurring in the loss given default, when a credit event occurs. In mathematical terms, the spread is the sum that makes the expected present value of the two lags the same, at the origination
There is a third type of settlement, called digital, where the seller pays a xed percentage (decided at the issue of the contract) on the notional. 3 See ISDA (2003) for specic contractual issues. 4 See Bomn, (2005), Choudry (2006) and Jankowitsch et al. (2007) for a more specic reference. 5 Intuitively, for 1 of notional value, the seller pays the loss given default LGD = (1 RR), where RR is the market value or simply the recovery rate of the reference asset.
2

of the contract, satisfying the following condition:

N

erti Q(ti ) =
i=1 0

tN

ert (100 Mt )q(t)dt,

(1)

where r is the constant risk-free rate, Q(t) is the risk neutral survival probability at time t t, with Q(ti ) = 1 0 i q(t)dt, q(t) is the risk neutral default probability, Mt is the market value and is the CDS premium. The left hand side corresponds to the premium leg, while the right hand side is the protection leg, namely the payments oered by the contract when a credit event happens.

2.2

No-Arbitrage Relation

An investor can buy credit risk by selling a CDS or by buying a bond, otherwise he can sell credit risk by buying a CDS protection or by selling a bond. Obviously, the choice of a bond or a CDS depends on funding issues. When dealers sell CDS protection they hedge credit risk short selling the risky bonds they obtain via repo. Conversely, when they buy CDS protection, they hedge credit risk by buying risky bonds that they nance paying a funding cost. (Fontana, 2009). When a particular bond is dicult to obtain as a collateral (i.e. during nancial distress periods), the associated repo rate may become special, namely may become lower than the risk-free rate, increasing the cost of shorting. Hence, it is more costly to provide a CDS short-selling the risky bond strategy. On the other hand, when the nancing rate is greater than the risk-free one, the dealer has a positive funding rate to realize the CDS - buying bond strategy. By buying a credit default swap on a certain sovereign entity and a bond issued by the same entity, one can replicate a riskless bond. Therefore the credit spread (defaultable minus the riskless bond) must equal the credit default swap spread. This simple no-arbitrage relationship is the baseline building block for every study of the lead-lag denitions between the two markets.6 Following Zhu (2004), we can state formally the no-arbitrage relationship between the CDS spread and the bond spread. The current price of the defaultable par xed coupon bond is:
N

P = 100 =
i=1

erti Q(ti )c + ertN 100Q(tN ) +

0

tN

ert Mt q(t)dt,

(2)

The price of a par xed coupon bond can be decomposed into three terms. The rst is the value of discounted coupons in the event that there is no default; the second is the value of the principal at maturity, while the third relates to the market value of the bond if it defaults. Assume that an investor shorts the defaultable bond and purchases a par xed rate riskfree note: since the risk-free rate is constant, the risk-free note can always be sold at
We ignore the presence of haircuts and upfront payments in the CDS contract. For a technical reference see J.P.Morgan (2009).
6

par, whenever the risky bond defaults. Given that the initial net investment is zero, the no-arbitrage relation requires that:
N tN 0 N N

0=
i=1 tN

erti Q(ti )c ertN 100Q(tN ) ert 100q(t)dt + ertN 100Q(tN )

ert Mt q(t)dt +
i=1

erti rQ(ti )+
tN 0

+
0

erti Q(ti )(c r) =

i=1

ert (100 Mt )q(t)dt (3)

Comparing this with the CDS pricing equation it is straightforward to obtain that = (c r), with the no-arbitrage relation between the two markets. According to Choudry (2006), this dierence is called cash-CDS basis. In this case, if c is the yield-to-maturity (YTM) on the bond, and r the YTM on risk-free bond, we have: c=r (4)

Obviously, if c is signicantly greater than r, it is protable to buy the T -year par yield bond issued by the reference entity, buy the default swap and short the T -year Treasury par yield. This is the negative basis strategy suggested by Choudry (2006): an investor aims to earn a risk-free return by buying and selling identical credit risk across dierent markets. On the other hand, if c is signicantly less than r, it is protable to short the T -year par yield bond, sell the credit default swap and buy the T -year Treasury par yield. As suggested by Blanco et al. (2004), Choudry (2006) and Zhu (2004), among others, this relation does not hold in practice due to a several market and contractual factors, like for example diculties in shorting cash bonds and liquidity, on the one hand, and the above or below par price of a bond, on the other.

3
3.1

Methodology and Data

Econometric Analysis

Since one of the main purpose of the paper is to examine the econometric properties of credit risk indicators (in our case credit default swap and bond spreads), modern time series techniques, like cointegration tests, Granger casuality test and vector error correction models are appropriate. To test whether the no-arbitrage theoretical relations hold empirically, it is possible to use the cointegration test proposed by Engle and Granger (1987): two series are cointegrated if there are one or more common trends that allow them to move in the same fashion in the long run. In simple terms, two series are cointegrated if their linear combination origins a stationary series. Let us assume for example that Xt and Yt are the two (integrated) 6

series of interest. If the two series are cointegrated, with cointegrating coecient , then the dierence Yt Xt is stationary, otherwise it has a unit root. The Engle and Granger test follows two steps. In the rst, we have to test if a series is stationary, while in the second we have to estimate the order of cointegration of the variables. The most common two tests are the Dickey-Fuller unit root test and the Phillips and Perron test.7 Moreover, given that the econometric literature has suggested that stationarity tests may have a lower power, it is possible to perform the two together with the DF-GLS test of Elliott et al. (1996).8 As suggested by Engle and Granger (1987), when the cointegrating coecient is unknown, it could be estimated by using for example an OLS estimation. Therefore, we have: Yt = + Xt + zt , (5)

and then perform the Engle-Granger-ADF on residuals zt of this regression, with an inter cept but without time trend. There are two dierent useful methodologies that allow us to estimate cointegrating vectors. The rst is the Johansen Maximum Likelihood analysis of cointegration (Johansen, 1988, and 1991), while the second is the Dynamic OLS (DOLS) proposed by Stock and Watson (1993). The Johansen methodology helps us in two dierent ways: it provides the number of cointegrating vectors, through the lambda-trace and lambda-max test, and it allows to estimate the value of the cointegrating coecients. On the other hand, Stock and Watson (1993) show that the estimator of in (5) is consistent, but with a non normal distribution. To overcome this problem, they have developed a modied version of (5), where Yt is also explained by past and future values in the variation of Xt :
p

Yt = 0 + Xt +
j=p

j Xtj + ut .

(6)

The DOLS estimator of is the OLS estimator of in (6). On the opposite side, when the cointegrating coecient is known, the stationarity hypothesis could be tested on zt = Yt Xt with Dickey-Fuller, Phillips-Perron, as well as DF-GLS test. All empirical literature on the lead-lag relationships among credit risk indicators (Blanco et al., 2004, and Zhu, 2004, among others) have veried that dierent prices should be equal in the long run, with a cointegrating vector of [1, -1, c]: for example, if CDS spreads and bond spreads are I(1) and the basis is I(0), there are no-arbitrage opportunities in the long run, as predicted by the theory, with a zero constant in the cointegrating space. The same could be applied to the CDS-bond basis. If the two prices do not cointegrate with the [1, -1, c] restriction, it is possible that either the two markets price credit risk dierently, that one credit risk market prices reect something other than credit risk (i.e. liquidity risk), or that one market price contains measurement errors. Blanco et al. (2004), De Wit
See Hamilton (1994) for a comprehensive treatment of cointegration and unit root analysis. Elliot, G., T., Rothenberg and J.H. Stock, Ecient Tests for an Autoregressive Unit Root, Econometrica, 64: 813-836.
8 7

(2006) and OKane and McAdie (2001) suggest that the failure of the cointegrating test depend on the presence of the cheapest-to-deliver option embedded in the CDS spreads. The study of the dynamic relationships among two variables can be decomposed with two dierent approaches, which allow to focus on both the short and the long-run properties. For the rst case, the Granger casuality test is a suitable measure. By using a Vector Autoregression (VAR) methodology, it is possible to detect if past values of a credit risk indicator (for example CDS spreads) can predict future values of the other indicator (for example bond spreads). The number of lags in the VAR can be selected according to the most common used information criteria, like for example Akaike Information Criteria (AIC) or Schwartz Information Criteria (SIC), or Hannan and Quinn (HQ) criteria. After VAR estimation, the Granger casuality test can be performed by an F-test with null hypothesis that all coecients of past values are zero, against that at least one is dierent from zero. More specically, if we want to verify the casuality relationship from Xt to Yt , we can write:
p p

Yt = +
i=1

i Yti +
i=1

i Xti +

(7)

and perform the F-test with H0 : 1 =2 =. . .=p =0, and H1 = i = 0, with at least one i dierent from zero. We can say that this test could be considered as a rst approximation of the relationships between dierent credit risk indicators. However, the empirical literature shows that Granger casuality test does not give a direct answer of the casuality relations, as suggested for example by Zhu (2004). In the second case, when two or more variables are cointegrated, one can use the vector error correction model (VECM) to further investigate the dynamic relationships between credit risk indicators, as well as to compute the contributions of price discovery. The VECM becomes:
p p

pCDS,t = 1 (pCDS,t 0 1 pBS,t1 ) +

j=1 p

1,j pCDS,tj +
j=1 p

1,j pBS,tj + 1t

pBS,t = 2 (pCDS,t 0 1 pBS,t1 ) +

j=1

2,j pCDS,tj +
j=1

2,j pBS,tj + 2t (8)

with pCDS the CDS spreads, pBS the bond spread and it i.i.d. residuals. The lagged basis spread is the error correction term and it is used as an added explanatory variable. The meaning of the coecients of the error correction term (1 and 2 ) is straightforward: they measure the degree to which prices in a particular market adjust to correct price discrepancies from their long term trend. For example, if 1 is negative and signicantly dierent from zero, the bond market is contributing to the discovery of credit risk and the CDS market adjusts to remove pricing errors, while if 2 is positive and signicantly dierent from zero, the CDS market contributes to the discovery of credit risk and bond

market adjusts to remove pricing errors.9 If both coecients are signicant, then both markets contribute to price discovery. In our analysis, when the traditional basis is I(0), we assume that 0 = 0 and 1 = 1, while we relax these restrictions on the error correction term by using the cointegrating vectors according to both the DOLS and Johansens methodology. Moreover, when the cointegrating vector is augmented with other variables, the new system of equations for the VECM becomes: pCDS,t = 1 (pCDS,t 0 1 pBS,t1 2 eq/liqt1 ) +
p p p

1,j pCDS,tj +
j=1 j=1

1,j pBS,tj +
j=1

1,j eq/liqtj + 1t

pBS,t = 2 (pCDS,t 0 1 pBS,t1 2 eq/liqt1 ) +

p p p

2,j pCDS,tj +
j=1 j=1

2,j pBS,tj
j=1

2,j eq/liqtj + 2t

(9)

eq/liqt = 3 (pCDS,t 0 1 pBS,t1 2 eq/liqt1 ) +

p p p

3,j pCDS,tj +
j=1 j=1

3,j pBS,tj
j=1

3,j eq/liqtj + 3t ,

with eq/liqt our equity or liquidity proxy. Once the VECM is constructed, we can compute the measures to understand price discovery. According to the Gonzalo and Granger (1995) study, we calculate the contribution of each market to price discovery by measuring the ratio of the speed of adjustment in the two markets. More specically, the contributions of market 1 (the CDS market) to price discovery is: 2 GG = , (10) 2 1 with a lower bound of zero and an upper bound of 1: when the value is negative, the indicator is zero, while if the value is above 1, GG worths 1. If this measure tends to 1, CDS market leads in price discovery and bond market moves afterwards, to correct for pricing errors; if this measure tends to 0, bond market leads the derivative market, while, if the measure is close to 0.5, both markets contribute to price discovery and we can say nothing about the leading market. Even in this case, the analysis can be extended to the CDS-bond basis, or to other variables. On the other hand, the Hasborucks measure is constructed by using the variance-covariance
9 These two relations hold when the cointegrating coecient is positive for CDS and negative for bond spreads. If the signs are inverted, 1 (2 ) must be positive (negative) and signicantly dierent from zero to give same considerations for price discovery.

matrix of VECM residuals. We can dene the bounds as:

2 2 1 2
2 12 2 2

HAS1 =

2 2 2 1 21 2 12 + 2 2 1

, HAS2 =

2 1 1 12 1

2 2 2 1 21 2 12 + 2 2 1

(11)

where volatilities relate to the variance-covariance matrix between 1t and 2t . Hasbrouck measure is rarely used in the literature because of the dependence of the bounds from the residual correlation. In the case of augmented VECM system, we calculate the two price discovery measures in the same way as the initial VECM. We use the test in Aktung et al. (2009) to check for the appropriateness of the error correction mechanism: the test is simply the dierence (2 1 ), that must be positive for an appropriate error correction.

3.2

Data selection

We perform the empirical analysis on a sample of 15 Emerging markets: Brazil, Chile, China, Colombia, Czech Republic, Hungary, Indonesia, Malaysia, Mexico, Peru, Philippines, Poland, South Africa, Thailand and Turkey. Our investigated period spanned from 15 September 2008 to 5 May 2010, with daily frequency. Data are gathered from Datastream. Sovereign bond spreads over the swap curve are extracted using datatype SWSP, choosing those with xed coupon. We decide to compute median values for bonds with maturity up to 2015 (included), following the rationale of Alexopoulou et al. (2009). Mid values of CDS spreads have 5 year maturity: we concentrate on it either for comparison with the bond market or because this is the most traded maturity. Our equity measure is the MSCI index for every Emerging market and we choose indexes for the purpose of cross-country comparison. Moreover, our liquidity measure is the spread between the US three month Libor and US overnight repo on a 5 year collateral.

Results

We divide this section into two subsections for ease of exposition. In the rst one, we present descriptive statistics and cointegration analysis, while in the second one we concentrate on short and long term dynamic interactions between CDS, bonds, equity indexes and our liquidity (cost of funding) proxy.

4.1

Descriptive statistics and Cointegration Analysis

Table (1) reports descriptive statistics for CDS and bond spreads. On average, CDS are greater than bond spreads by about 20 basis points, even if bonds are more volatile. In 5 cases out of 15 mean values of bond spreads are grater than CDS spreads, reecting some heterogeneity among countries. Dierences are also conrmed in ranges, that are higher in CDS (i.e. Czech Republic and Thailand) or in bonds (i.e. Brazil and Chile). Unit root 10

analysis conrms our initial assumption about non stationarity in the data.10 We conduct cointegration analysis with the usual Johansen trace test upon three dierent cointegrating vectors obtained from the Johansen methodology (with and without a constant) and from DOLS.11 We apply three dierent information criteria for the VAR lag length selection (AIC, SIC and HQ). In Table (2) and (3) we present cointegration analysis for CDS and bond spreads. We denote absence of cointegration in Brazil, Chile, Colombia, Mexico, South Africa and China for all cases considered. Moreover, we nd that there are cases where dierent lag length criteria produce dierent results in terms of cointegration (Indonesia, Peru, Hungary, for example). In general our analysis does not reject the presence of at most one cointegrating vector for the rest of the countries. We can also conduct an interpretation of DOLS results in terms of cointegrating coecients. In 7 cases the no-arbitrage condition among CDS and bond spreads is fully respected, with a cointegrating vector [1,-1].12 We decide to add other two variables (an equity index and a liquidity proxy) separately into the above cointegrating vectors to try to interpret the relation among CDS and bond spreads in the long run. Tables (4) and (5) show the Johansen cointegration test with cointegrating vectors estimated only with AIC. All considered countries present at most one or more cointegrating vectors. Evidence suggests that adding one variable to the noarbitrage condition helps restoring the long run relation in this troubled period. Hence, these ndings conrm our deep interest in those variables: for equity indexes we want to test whether this market is more informative than others, while for liquidity our interest is in adding the cost of funding into the no-arbitrage relation.

4.2

Short and Long Term Dynamic Interactions

Short term dynamics is studied with a Granger Causality test and presented in Table (6).13 In (a) we note that in 7 cases CDS spreads are useful predictors of bonds, while in only one case the opposite is true (Czech Republic). In 4 cases both these two relations hold. Only in Chile, China and Thailand there is no explanatory power neither in CDS nor in bond spreads. In (b) we present evidence about the inclusion of the equity index: equity is able to forecast CDS spreads in 8 cases out of 15, while the opposite is true in particular for Asian countries (China, Indonesia, Malaysia, Philippines and Thailand); equity has useful predictive power for bond spreads in only 6 cases, while the opposite holds for Hungary and Malaysia. Moreover, there are no changes compared to relations in (a). Evidence of a bidirectional connection between equity and CDS is shown in China, Malaysia, Philippines and Thailand, while the relation between bonds and equity holds for Malaysia and Czech Republic. In (c) the inclusion of liquidity is not signicant in the
We provide econometric analysis with dierent tests. Detailed results are provided upon request. Cointegrating vectors estimated by the Johansen methodology are not normalized to one. 12 A Wald test does not reject that the cointegrating coecient is statistically not dierent from -1. However, we do not consider the constant concentrating on the denition of cash-CDS basis. 13 Tables contain the usual F-test for joint hypothesis.
11 10

11

short run. The only change with respect to (a) is that bonds do not Granger cause CDS for South Africa. In light of these results, short run empirical evidence shows that equity and CDS are the leading markets for the majority of our sample, even if bidirectional relations do not suggest a clear evidence that the connection goes in a certain direction. Long run dynamics is studied through Gonzalo-Granger (1995) and Hasbrouck (1995) measures.14 We also report a test for the appropriateness of the error correction model as in Aktung et al. (2009), together with mean values for the upper and lower bound of Hasbrouck (1995). Tables (7) and (8) show that in the vast majority of our sample the derivative market leads the bond market in terms of price discovery: this holds for 8 out of 9 countries. This result emerges by considering the most frequent outcome for each country, either in terms of Gongalo-Granger or in terms of the mean values for Hasbrouck bounds. We also check for the appropriateness of our VECM, which is correct except for some minor cases. Table (9) reports results after the inclusion of equity indexes: in 7 countries out of 14 CDS leads the bond market in terms of price discovery.15 Only Czech Republic and Thailand present dierent results with respect to the bivariate VECM analysis. Table (10), nally, reports the price discovery results after adding the liquidity measure: in 7 cases out of 11 CDS spreads lead bond spreads, while the opposite is true for 4 cases. There is no clear information for Brazil, Czech Republic, Malaysia and Turkey. These results conrm that CDS market is the best trading vanue for credit risk: derivatives markets anticipate credit risk information more rapidly than bond markets.

14 15

The number of lags is the same used in the cointegration analysis. There is no clear result for Philippines.

12

Conclusions

This paper analyzes the econometric properties of dierent credit risk markets for Emerging economies, by focusing on short and long run relations in the post Lehman Brothers period. Equity and cost of funding are also considered in the study. For the short run, empirical ndings conrm that CDS spreads are useful predictors for bond spreads, while equity movements are able to forecast CDS spreads. However there is a bidirectional relation in Asian countries that does not suggest a clear casuality in the short run. Cost of funding is not a good predictor for other credit risk markets. For the long run, price discovery measures conrm that CDS market moves ahead of the bond market and is the leader in terms of price discovery of credit risk. Credit risk information for Emerging markets are embedded more rapidly in derivatives markets. When the cointegrating vector is augmented with equity or liquidity, the error correction model conrms the leading properties of CDS markets, while cointegration assumption holds for more countries. Finally, the appropriateness of the error correction model is conrmed by the non negative dierence between the speed of adjustment coecients.

13

References
[1] Aktug, E., G. Vasconcellos and Y. Bae, 2009, The Dynamics of Sovereign Credit Default Swap and Bond Markets: Empirical Evidence from the 2001-2007 Period. Working Paper. [2] Alexopoulou, I., M. Anderson and O.M. Georgescu, 2009, An Empirical Study on the Decoupling Movements, between Corporate Bond and Cds Spreads. ECB working paper n. 1085. [3] Ballie, R.T., G.G. Booth, Y. Tse and T. Zabotina, 2002, Price Discovery and Common Factor Models Journal of Financial Markets 5, 309321. [4] Banque de France, 2010, Financial Stability Review, July. [5] Black, F. and M. Scholes, 1973, The Pricing of Options and Corporate Liabilities, The Journal of Political Economy, Vol. 81, n. 3, 637654. [6] Blanco, R., S. Brennan and I.W. Marsh, 2004, An Empirical Analysis of the Dynamic Relationship between Investment-Grade Bonds and Credit Default Swaps, Banco de Espana, Documento de Trabajo n. 0401. [7] Bomn, A.N., 2005, Understanding Credit Derivatives and Related Instruments, Elsevier Academic Press. [8] Bystrm, H., 2005, Credit Default Swaps and Equity Prices: the iTraxx Cds Index o Market, in Credit Risk - Models, Derivatives, and Management, Wagner, Niklas (eds.), 2008, p.69-83. [9] Carmassi, J. and S. Micossi, 2010, How Politicians Excited Financial Markets Attack on the Eurozone, VoxEU.org, 24 June. [10] Chan-Lau, J.A. and Y.S. Kim, 2004, Equity Prices, Credit Default Swaps, and Bond Spreads in Emerging Markets, IMF Working Paper n.27. [11] Chrouhy, M. 2006, The Credit Default Swap Basis, Bloomberg Professional. [12] Citigroup Global Markets, 2010, Credit Derivatives Under the Bonnet: A primer on CDS, Indices and Tranches, Corporate Securities Strategy. [13] Collin-Dufresne, P., R.S. Goldstein and J.S. Martin, 2001, The Determinants of Credit Spread Changes, The Journal of Finance, Vol 56, n.6, 2177-2207. [14] Cossin, D., and T. Hricko, 2001, Exploring the Determinants of Credit Risk in Credit Default Swap Transaction Data, EMFA 2001 Lugano Meetings.

14

[15] Coudert, V. and M. Gex, 2010, Credit Default Swap and Bond Markets: Which Leads the Other?, Banque de France, Financial Stability Review, Derivatives, n.14. [16] Credit Suisse, 2007, Credit Derivatives Handbook, Fixed Income Research. [17] Credit Suisse, 2010, Sovereign CDS Primer, Fixed Income Research. [18] de Jong, F., 2002, Measures of Contributions to Price Discovery: a Comparison, Journal of Financial Markets, Vol.5, 3, 323-327. [19] De Wit, J., 2006, Exploring the CDS-bond basis, National Bank of Belgium, Working Paper n.104. [20] Di Cesare, A., and G. Guazzarotti, 2010, An Analysis of the Determinants of Credit Default Swap Spread Changes Before and During the Subprime Financial Turmoil, Bank of Italy, Temi di Discussione n.749, March. [21] Due, D., 1999, Credit Swap Valuation, Financial Analysts Journal, Vol.55, n.1, 73 - 87. [22] Due, D., 2010a, Credit Default Swaps on Government Debt: Potential Implications of the Greek Debt Crisis, Testimony to United States House of Representatives, Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, Hearing of April 29. [23] Due, D., 2010b, Is There a Case for Banning Short Speculation in Sovereign Bond Markets Banque de France, Financial Stability Review, Derivatives, n.14. [24] Due, D. and K.J. Singleton, 2003. Credit risk, Pricing, Measurement and Management, Princeton Series in Finance. [25] Ehlers, S., M. Gurtler and S. Olboeter, 2010, Financial Crisis and Information Transfer - An Empirical Analysis of the Lead-Lag Relationship between Equity and CDS iTraxx Indices, Working Paper. [26] Engle, R. and C.W.J Granger, 1987, Cointegration and error correction: representation, estimation and testing, Econometrica, Vol 55, 251-276. [27] Ericsson, J., K. Jacobs and R.A. Oviedo, 2004, The Determinants of Credit Default Swap Premia, CIRANO, Scientic Series, s-55. [28] Fontana, A., 2009, The Persistent Negative CDS-Bond Basis During the 2007/08 Financial Crisis, Working Paper. [29] Forte, S. and J.I. Pea 2007, Credit Spreads: Theory and Evidence on the Informan tional content of Stocks, Bonds and CDS, Universitad Carlos III, Business Economics Working Papers, n.wb063310. 15

[30] Gonzalo, J. and Granger, C.W.J., 1995, Estimation of Common Long-Memory Components in Cointegrated Systems, Journal of Business and Economic Statistics, ERS2002-23-F&A. [31] Granger C.W.J., 1969, Investigating Causal Relations by Econometric Models and Cross-Spectral Methods, Econometrica, Vol. 34, 150-161. [32] Hamilton J.D., 1994, Time series analysis, Princeton University Press. [33] Harris, F.H.deB., T.H. McInish and R.A. Wood, 2002, Security Price Adjustment Across Exchanges: an Investigation of Common Factor Components for Dow stocks, Journal of Financial Markets, Vol. 5,3, 277-308. [34] Harris, F.H.deB., T.H. McInish and R.A. Wood, 2002, Common Factor Components Versus Information Shares: a Reply, Journal of Financial Markets, Vol. 5, 3, 341-348. [35] Hasbrouck, J., 1995. One Security, Many Markets: Determining the Contributions to Price Discovery, Journal of Finance, Vol. 50, 1175-1199. [36] Hasbrouck, J., 2002. Stalking the Ecient Price in Market Microstructure Specications: an Overview, Journal of Financial Markets, Vol. 5, 3, 329-339. [37] Houweling P. and T. Vorst, 2002, An Empirical Comparison of Default Swap Pricing Models, ERIM Report Series Research in Management, Vol. 29, 1331-1358. [38] Houweling P. and T. Vorst, 2005, Pricing Default Swaps: Empirical Evidence, Journal of International Money and Finance, Vol. 24, 1200-1225. [39] Hull, J and A. White, 2000, Valuing Credit Default Swaps I: No Counterparty Default Risk, Journal of Derivatives, Vol. 8, n.1, 29-40. [40] ISDA, 2003, Credit Derivatives Denitions. [41] IFLS, 2009, Derivatives 2009, June. [42] J.P. Morgan 2009, The Bond-CDS Funding Basis, Europe Credit Derivatives Research, 25 September 2009. [43] Jankowitsch, R., R. Pullirsch and T. Vea, 2007, The Delivery Option in Credit z Default Swaps, EFA 2007 Ljubjliana Meetings Papers. [44] Johansen, S., 1988, Statistical Analysis of Cointegration Vectors, Journal of Economic Dynamics and Control, Vol. 12, 231-254. [45] Johansen, S., 1991, Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models, Econometrica, Vol. 59, 1551-80.

16

[46] Kavussanos, M. and M. Palamidi, 2008, Empirical Investigation of the Dynamic Relation Between the Corporate Bond Market and the Credit Default Swap Market , European Financial Management Association 2008 Annual Conference. [47] Lehman, B.N., 2002, Some Desiderata for the Measurement of Price Discovery Across Markets, Journal of Financial Markets, Vol.5, 3, 259-276. [48] Levin, A., R. Perli and E. Zakrajek, 2005, The Determinants of Market Frictions in s the Corporate Market Computing in Economics and Finance working paper, n.379. [49] Longsta, F.A. S. Mithal and E.Neis, 2003, The Credit-Default Swap Market: is Credit Protection Priced Correctly?, USC FBE Finance Seminar. [50] Longsta, F.A. J. Pan, L.H. Pedersen and K.J. Singleton, 2007, How Sovereign is Sovereign Credit Risk?, NBER Working Paper, n. 13658. [51] Merton, R.C., 1973, On the Pricing of Corporate Debt: The Risk Structure of Interest Rates, Journal of Finance, Vol. 29, n. 2, 449-470. [52] Norden, L. and M. Weber, 2004, The Co-movement of Credit Default Swap, Bond and Stock Markets: an Empirical Analysis CEPR discussion paper, No. 4674. [53] OKane, D., 2001, Credit Derivatives Explained, Market, Products and Regulation Structured Credit Research, Lehman Brothers. [54] OKane, D. and R. McAdie 2001, Explaining the Basis: Cash versus Default Swaps Structured Credit Research, Lehman Brothers Fixed Income Research. [55] OKane, D. and S. Sen 2004, Credit Spreads Explained Quantitative Research Quarterly, Lehman Brothers Fixed Income Quantitative Research. [56] Stock, J. H. and M. W. Watson, 1993, A Simple Estimator of Cointegrating Vectors in Higher-Order Integrated Systems, Econometrica, Vol. 61, n. 4, 783-820. [57] Tang, D.Y. and H. Yan, 2007, Liquidity and Credit Default Swap Spreads, Working Paper. [58] Zhu, H., 2004, An Empirical Comparison of Credit Spreads Between the Bond Market and the Credit Default Swap Market, BIS Working Paper, n. 160.

17

Figures and Tables.

East Europe
700
Czech Republic Hungary Poland

Asia
1250 China Indonesia Malaysia Philippines Thailand

600

1000 500 750 400

300

500

200 250 100 0 0

-100 2009

-250 2009

South America
800 700 600 500 400 300 200 100 0 -100 2009 900

Others
Brazil Chile Colombia Mexico Peru
800 700 600 500 400 300 200 100 0 2009 South Africa Turkey

Figure 1: Bond Spreads.

18

East Europe
700
Czech Republic Hungary Poland

Asia
1400 China Indonesia Malaysia Philippines Thailand

600

1200

500

1000

400

800

300

600

200

400

100

200

0 2009

0 2009

South America
700 900

Others
Brazil Chile Colombia Mexico Peru
South Africa Turkey 800

600

700

500

600 400 500 300 400 200 300 100

200

0 2009

100 2009

Figure 2: CDS spreads.

19

East Europe
400 500 400 300 200 200 100 100 0 -100 -100 -200 -200
Czech Republic Hungary Poland

Asia
China Indonesia Malaysia Philippines Thailand

300

-300 -400

-300 2009

2009

South America
300 300

Others

200

200

100 100 0 0 -100 -100

-200

Brazil Chile Colombia Mexico Peru

2009

-200

-300
South Africa Turkey

-300

-400 2009

Figure 3: Cash - CDS basis.

20

Table 1: Descriptive statistics

CDS spreads Brazil Chile Colombia Mexico Peru Czech Hungary Poland South Africa China Indonesia Malaysia Philippines Thailand Turkey Overall mean Mean 214.622 134.590 241.876 227.941 222.565 126.131 317.348 175.434 249.179 115.230 376.264 152.483 267.635 161.414 291.617 218.289 St.dev 105.930 70.840 108.871 107.261 111.198 66.023 120.831 78.381 126.385 59.933 229.824 81.249 119.883 79.680 127.979 106.284 Min 110.000 49.200 124.855 98.025 106.895 49.000 140.700 57.300 114.200 57.755 149.370 68.485 149.295 77.835 153.840 100.450 Max 600.800 315.000 613.300 606.700 611.200 350.000 638.440 417.580 683.300 296.700 1256.700 520.200 870.000 524.200 849.200 610.221 Range 490.800 265.800 488.445 508.675 504.305 301.000 497.740 360.280 569.100 238.945 1107.330 451.715 720.705 446.365 695.360 509.771 Unit root I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1)

bond spreads Brazil Chile Colombia Mexico Peru Czech Hungary Poland South Africa China Indonesia Malaysia Philippines Thailand Turkey Overall mean Mean 154.247 80.291 247.629 169.080 253.809 97.748 275.894 104.368 300.498 67.423 437.555 134.692 257.234 219.081 223.662 201.547 St.dev 110.732 60.151 136.662 97.656 159.748 47.418 172.605 67.897 181.305 65.071 267.280 97.132 90.778 41.783 123.790 114.667 Min 18.200 -27.150 84.550 20.500 60.350 -1.000 13.300 3.200 114.100 -18.850 129.700 19.800 147.710 83.900 76.700 48.334 Max 583.900 186.050 651.800 524.900 727.200 197.700 626.100 225.000 829.450 258.950 1226.700 599.000 460.024 303.500 873.100 551.558 Range 565.700 213.200 567.250 504.400 666.850 198.700 612.800 221.800 715.350 277.800 1097.000 579.200 312.314 219.600 796.400 503.224 Unit root I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(0) I(1) I(1) I(0)

21

Table 2: Cointegration analysis: CDS vs bond spreads.

Brazil Johansen GG aic Johansen GG bic Johansen GG hq Dols GG aic Dols GG bic Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq Chile Johansen GG aic Johansen GG bic Johansen GG hq Dols GG aic Dols GG bic Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq Colombia Johansen GG aic Johansen GG bic Johansen GG hq Dols GG aic Dols GG bic Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq Mexico Johansen GG aic Johansen GG bic Johansen GG hq Dols GG aic Dols GG bic Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq Peru Johansen GG aic Johansen GG bic Johansen GG hq Dols GG aic Dols GG bic Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq Czech Johansen GG aic Johansen GG bic Johansen GG hq Dols GG aic Dols GG bic Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq Hungary Johansen GG aic Johansen GG bic Johansen GG hq Dols GG aic Dols GG bic Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq trace 8.0264 4.7246 3.9747 12.7413 10.9822 8.1069 trace 11.3340 11.9630 11.9630 13.7190 15.1458 15.1458 trace 9.3779 7.4741 5.9861 10.7107 11.3454 7.7386 trace 4.9158 5.5449 3.4783 7.9196 9.2491 5.8834 trace 5.4533 4.6338 5.4274 6.8298 8.1881 8.0644 trace 0.8189 0.8742 0.8015 3.0133 5.4687 4.7274 trace 7.9437 0.7374 0.5951 3.1024 3.5364 3.3900 trace95% 12.2800 12.2800 12.2800 20.1600 20.1600 20.1600 trace95% 12.2800 12.2800 12.2800 20.1600 20.1600 20.1600 trace95% 12.2800 12.2800 12.2800 20.1600 20.1600 20.1600 trace95% 12.2800 12.2800 12.2800 20.1600 20.1600 20.1600 trace95% 4.0700 12.2800 12.2800 9.1400 20.1600 20.1600 trace95% 4.0700 4.0700 4.0700 9.1400 9.1400 9.1400 trace95% 12.2800 4.0700 4.0700 9.1400 9.1400 9.1400 at most none none none none none none at most none none none none none none at most none none none none none none at most none none none none none none at most more than 1 none none one none none at most one one one one one one at most none one one one one one constant 0 0 0 na na na -1.704235 -2.274737 -2.105598 constant 0 0 0 na na na 0.428518 -0.855228 -0.855228 constant 0 0 0 na na na -0.716283 -1.455424 0.851093 constant 0 0 0 na na na 1.398309 -1.607289 -1.614831 constant 0 0 0 na na na -0.219989 -1.624622 -1.394770 constant 0 0 0 na na na -0.099315 0.484046 0.631077 constant 0 0 0 na na na 4.789945 3.039584 3.086512 cds 0.016727 0.014391 0.016060 1.0 1.0 1.0 0.027305 0.026632 0.027578 cds 0.023567 0.018831 0.018831 1.0 1.0 1.0 -0.022734 0.023710 0.023710 cds 0.017177 0.016870 0.017395 1.0 1.0 1.0 0.020330 0.020072 0.016348 cds -0.016144 0.017300 0.017459 1.0 1.0 1.0 -0.021368 0.020308 0.020995 cds -0.002399 0.018116 0.018300 1.0 1.0 1.0 -0.000798 0.022545 0.023304 cds 0.028557 0.020574 0.021096 1.0 1.0 1.0 0.028778 0.018973 0.018871 cds 0.014313 0.011713 0.011914 1.0 1.0 1.0 -0.038199 -0.023245 -0.024550 bs -0.022599 -0.020525 -0.021830 -0.915350 -0.895587 -0.895275 -0.027467 -0.023080 -0.025338 bs -0.035812 -0.028594 -0.028594 -1.038647 -0.989548 -0.981269 0.030586 -0.028372 -0.028372 bs -0.017081 -0.015107 -0.016422 -0.733740 -0.704627 -0.709021 -0.017457 -0.013421 -0.020451 bs 0.022520 -0.022136 -0.022643 -0.973075 -0.975213 -0.962985 0.021336 -0.017797 -0.019111 bs 0.006077 -0.014902 -0.015395 -0.739948 -0.627896 -0.633584 0.005392 -0.013479 -0.015113 bs -0.032934 -0.025534 -0.026079 -1.005130 -0.964974 -0.984784 -0.032328 -0.027776 -0.028849 bs -0.014808 -0.012111 -0.012464 -0.658126 -0.639910 -0.645862 0.025694 0.015541 0.016814

Table 3: Cointegration analysis: CDS vs bond spreads (contd).

Poland Johansen GG aic Johansen GG bic Johansen GG hq Dols GG aic Dols GG bic Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq South Africa Johansen GG aic Johansen GG bic Johansen GG hq Dols GG aic Dols GG bic Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq China Johansen GG aic Johansen GG bic Johansen GG hq Dols GG aic Dols GG bic Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq Indonesia Johansen GG aic Johansen GG bic Johansen GG hq Dols GG aic Dols GG bic Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq Malaysia Johansen GG aic Johansen GG bic Johansen GG hq Dols GG aic Dols GG bic Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq Philippines Johansen GG aic Johansen GG bic Johansen GG hq Dols GG aic Dols GG bic Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq Thailand Johansen GG aic Johansen GG bic Johansen GG hq Dols GG aic Dols GG bic Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq Turkey Johansen GG aic Johansen GG bic Johansen GG hq Dols GG aic Dols GG bic Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq trace 4.4755 0.5387 8.3745 7.9108 3.2774 12.2036 trace 9.4718 5.2081 5.8769 11.0304 8.6397 7.6165 trace 11.5030 11.2141 11.5030 14.8138 15.7007 14.8138 trace 10.8311 0.9983 11.899 11.0270 2.7920 18.9119 trace 0.6471 0.6592 0.6592 17.9519 17.2532 17.2532 trace 11.8115 0.4490 0.4291 15.3755 1.4745 1.2403 trace 8.3981 6.8502 6.8502 3.4161 14.7835 14.7835 trace 12.1104 1.8889 1.8889 12.2057 5.7697 5.7697 trace95% 12.2800 4.0700 12.2800 20.1600 9.1400 20.1600 trace95% 12.2800 12.2800 12.2800 20.1600 20.1600 20.1600 trace95% 12.2800 12.2800 12.2800 20.1600 20.1600 20.1600 trace95% 4.0700 4.0700 4.0700 9.1400 9.1400 20.1600 trace95% 4.0700 4.0700 4.0700 20.1600 20.1600 20.1600 trace95% 12.2800 4.0700 4.0700 20.1600 9.1400 9.1400 trace95% 12.2800 12.2800 12.2800 9.1400 20.1600 20.1600 trace95% 12.2800 4.0700 4.0700 20.1600 9.1400 9.1400 at most none one none none one none at most none none none none none none at most none none none none none none at most more than 1 one one more than 1 one none at most one one one none none none at most none one one none one one at most none none none one none none at most none one one none one one constant 0 0 0 na na na 1.615759 0.000000 -1.036853 constant 0 0 0 na na na -0.611533 -1.483816 -0.961294 constant 0 0 0 na na na -0.713228 -1.045489 -0.713228 constant 0 0 0 na na na 0.223540 0.373494 0.197766 constant 0 0 0 na na na 0.155600 0.043913 0.043913 constant 0 0 0 na na na 1.394450 0.997177 0.998463 constant 0 0 0 na na na 5.376039 -5.519648 -5.519648 constant 0 0 0 na na na -0.163881 -1.053916 -1.053916 cds 0.017926 0.016288 0.016671 1.0 1.0 1.0 -0.025239 -0.020477 0.021796 cds 0.018770 0.018537 0.018601 1.0 1.0 1.0 0.021471 0.021603 0.022103 cds -0.014081 0.013611 -0.014081 1.0 1.0 1.0 0.019278 0.020279 0.019278 cds -0.006672 0.028750 0.029356 1.0 1.0 1.0 0.005857 -0.028934 -0.029611 cds 0.018705 0.018400 0.018400 1.0 1.0 1.0 -0.019537 -0.018645 -0.018645 cds 0.025969 0.017519 0.018367 1.0 1.0 1.0 0.028293 0.017678 0.018679 cds 0.013267 0.012054 0.012054 1.0 1.0 1.0 0.004494 0.005553 0.005553 cds -0.022571 0.018808 0.018808 1.0 1.0 1.0 0.023827 0.023931 0.023931 bs -0.028659 -0.025319 -0.026084 -0.992474 -0.949945 -0.963809 0.026821 0.024712 -0.026090 bs -0.015325 -0.014465 -0.014956 -0.646048 -0.641605 -0.640565 -0.015854 -0.013037 -0.015153 bs 0.021597 -0.020158 0.021597 -0.694907 -0.620653 -0.694907 -0.021732 -0.018847 -0.021732 bs 0.007762 -0.024429 -0.025084 -0.874727 -0.835173 -0.834569 -0.007439 0.023929 0.024947 bs -0.020390 -0.020027 -0.020027 -0.803611 -0.785133 -0.785133 0.020396 0.020038 0.020038 bs -0.027350 -0.018590 -0.019463 -1.250681 -1.183482 -1.196684 -0.034772 -0.022218 -0.023258 bs -0.008910 -0.008218 -0.008218 -0.427531 -0.145184 -0.145184 -0.026852 0.020837 0.020837 bs 0.029819 -0.023773 -0.023773 -1.101870 -0.987522 -0.987522 -0.030793 -0.026206 -0.026206

Table 4: Cointegration analysis: CDS, bond spreads and equity indexes.

Brazil Johansen GG aic Joh const GG aic Chile Johansen GG aic Joh const GG aic Colombia Johansen GG aic Joh const GG aic Mexico Johansen GG aic Joh const GG aic Peru Johansen GG aic Joh const GG aic Czech Johansen GG aic Joh const GG aic Hungary Johansen GG aic Joh const GG aic Poland Johansen GG aic Joh const GG aic South Africa Johansen GG aic Joh const GG aic China Johansen GG aic Joh const GG aic Indonesia Johansen GG aic Joh const GG aic Malaysia Johansen GG aic Joh const GG aic Philippines Johansen GG aic Joh const GG aic Thailand Johansen GG aic Joh const GG aic Turkey Johansen GG aic Joh const GG aic trace 8.9995 13.2976 trace 0.6966 16.9631 trace 6.3337 8.3127 trace 5.3930 8.4636 trace 4.9217 7.1899 trace 0.7634 17.8566 trace 5.7142 14.8480 trace 6.4435 11.3194 trace 10.4128 12.2140 trace 10.1093 13.2918 trace 11.3473 19.7185 trace 0.6975 15.3515 trace 12.2316 16.2475 trace 8.5639 3.9686 trace 11.6539 12.0930 trace95% 12.2800 20.1600 trace95% 4.0700 20.1600 trace95% 12.2800 20.1600 trace95% 12.2800 20.1600 trace95% 12.2800 20.1600 trace95% 4.0700 20.1600 trace95% 12.2800 20.1600 trace95% 12.2800 20.1600 trace95% 12.2800 20.1600 trace95% 12.2800 20.1600 trace95% 4.0700 20.1600 trace95% 4.0700 20.1600 trace95% 12.2800 20.1600 trace95% 12.2800 9.1400 trace95% 12.2800 20.1600 at most one one at most two one at most one one at most one one at most one one at most two one at most one one at most one one at most one one at most one one at most more than two one at most two one at most one one at most one two at most one one constant 0 -0.142456 constant 0 0.490129 constant 0 0.677523 constant 0 0.155859 constant 0 -0.046376 constant 0 -0.236255 constant 0 0.127056 constant 0 0.160720 constant 0 0.303120 constant 0 0.188870 constant 0 0.315539 constant 0 0.613438 constant 0 0.214997 constant 0 1.700228 constant 0 -0.867654 cds -0.004150 0.005365 cds 0.000216 -0.004438 cds 0.000661 -0.003763 cds -0.000325 -0.000470 cds -0.000258 0.000036 cds 0.004663 -0.004237 cds -0.002588 -0.003403 cds -0.002028 0.000953 cds 0.001204 -0.002998 cds 0.000721 -0.002310 cds -0.003823 0.019338 cds -0.001410 -0.002379 cds 0.011191 -0.010271 cds 0.003371 0.003197 cds -0.006420 -0.000827 bs 0.005408 -0.006290 bs -0.000905 0.003080 bs -0.001001 0.001717 bs -0.000241 0.000542 bs 0.000018 -0.000088 bs -0.005824 0.007306 bs 0.002486 0.002976 bs 0.003029 -0.002540 bs -0.001152 0.001814 bs -0.002458 0.002899 bs 0.004546 -0.016983 bs 0.001043 -0.000391 bs -0.011841 0.010118 bs -0.003230 -0.010636 bs 0.007651 0.003848 msci equity 0.025240 -0.025283 msci equity 0.027202 -0.027540 msci equity 0.027923 -0.028638 msci equity 0.025318 -0.025474 msci equity 0.017150 0.017147 msci equity 0.016506 -0.016502 msci equity 0.019842 0.019761 msci equity 0.020321 -0.020494 msci equity 0.035571 -0.036005 msci equity 0.018308 -0.018371 msci equity 0.036085 -0.022263 msci equity 0.035701 -0.037727 msci equity 0.030470 -0.030586 msci equity 0.020627 0.021495 msci equity 0.025859 0.027658

24

Table 5: Cointegration analysis: CDS, bond spreads and liquidity proxy.

Brazil Johansen GG aic Joh const GG aic Chile Johansen GG aic Joh const GG aic Colombia Johansen GG aic Joh const GG aic Mexico Johansen GG aic Joh const GG aic Peru Johansen GG aic Joh const GG aic Czech Johansen GG aic Joh const GG aic Hungary Johansen GG aic Joh const GG aic Poland Johansen GG aic Joh const GG aic South Africa Johansen GG aic Joh const GG aic China Johansen GG aic Joh const GG aic Indonesia Johansen GG aic Joh const GG aic Malaysia Johansen GG aic Joh const GG aic Philippines Johansen GG aic Joh const GG aic Thailand Johansen GG aic Joh const GG aic Turkey Johansen GG aic Joh const GG aic trace 5.5229 11.4824 trace 2.3548 16.3534 trace 12.1731 14.0051 trace 7.8761 11.3978 trace 8.6472 11.0037 trace 7.9027 11.2400 trace 10.7176 6.0098 trace 7.4784 34.2038 trace 8.4828 12.1087 trace 1.9780 15.4776 trace 5.7929 17.6352 trace 2.7474 17.2817 trace 1.9574 4.9878 trace 5.1274 14.3702 trace 11.3818 6.6364 trace95% 12.2800 20.1600 trace95% 4.0700 20.1600 trace95% 12.2800 20.1600 trace95% 12.2800 20.1600 trace95% 12.2800 20.1600 trace95% 12.2800 20.1600 trace95% 12.2800 9.1400 trace95% 12.2800 35.0700 trace95% 12.2800 20.1600 trace95% 4.0700 20.1600 trace95% 4.0700 20.1600 trace95% 4.0700 20.1600 trace95% 4.0700 9.1400 trace95% 12.2800 20.1600 trace95% 12.2800 9.1400 at most one one at most two one at most one one at most one one at most one one at most one one at most one two at most one none at most one one at most two one at most more than two one at most two one at most two two at most one one at most one two constant 0 -0.023939 constant 0 -0.708064 constant 0 -1.014299 constant 0 -0.715086 constant 0 -0.358505 constant 0 -0.500555 constant 0 2.371663 constant 0 -0.363311 constant 0 -0.781250 constant 0 -0.771583 constant 0 -0.648118 constant 0 -0.710460 constant 0 0.083310 constant 0 5.033475 constant 0 -0.318986 cds 0.011202 0.011403 cds -0.007756 0.014805 cds 0.007523 -0.003510 cds 0.007600 -0.004349 cds 0.008397 -0.006362 cds 0.009793 -0.008778 cds 0.005360 -0.019527 cds 0.004906 0.007204 cds 0.007732 -0.003518 cds -0.007221 0.013546 cds -0.013232 -0.006052 cds 0.012559 -0.007008 cds -0.022519 -0.022483 cds -0.019461 0.021346 cds -0.016375 -0.943606 bs -0.026076 -0.026230 bs -0.001071 -0.002706 bs -0.014368 0.014612 bs -0.019661 0.019017 bs 0.014186 bs -0.016874 0.019679 bs -0.008717 0.016032 bs -0.014430 -0.015248 bs -0.011750 0.010408 bs -0.006467 0.004790 bs 0.009771 0.009964 bs -0.020682 0.019719 bs 0.020486 0.020074 bs 0.009484 -0.031203 bs 0.024809 0.023503 liquidity 1.791837 1.793681 liquidity 1.283027 -1.338934 liquidity 1.995642 -2.150158 liquidity 1.711559 -1.733979 liquidity 2.036911 -2.061773 liquidity 0.687902 -0.623506 liquidity 1.010621 -0.762601 liquidity 0.924724 0.929876 liquidity 1.664832 -1.667842 liquidity 1.318405 -1.297123 liquidity 2.197504 -1.815021 liquidity 0.838056 -0.989391 liquidity 0.855059 0.876120 liquidity 1.277016 -1.897962 liquidity -0.869675 -0.943606

25

Table 6: Granger Causality analysis: (a) VAR with CDS and bond spreads; (b) VAR with CDS, bond spreads and equity indexes; (c) VAR with CDS, bond spreads and liquidity proxy. F-statistic values.
Bonds do not GC CDS 0.1095 1.6624 0.2085 7.3927*** 0.0046 5.9973** 2.1585 2.4882 2.1754* 0.2248 11.3477*** 11.4786*** 0.7575 0.5536 5.7120** CDS do not GC Bonds 68.0827*** 2.5341 26.2716*** 69.0684*** 24.9690*** 1.6479 35.6572*** 21.2394*** 20.4449*** 0.0076 30.2605*** 14.0055*** 3.2861** 0.5077 45.1332***

(a) Country Brazil Chile Colombia Mexico Peru Czech Hungary Poland South Africa China Indonesia Malaysia Philippines Thailand Turkey

(b) Country Brazil Chile Colombia Mexico Peru Czech Hungary Poland South Africa China Indonesia Malaysia Philippines Thailand Turkey

Bonds do not GC CDS 0.0231 0.4736 0.3256 3.7606* 0.0945 5.2758** 3.6495* 2.1601 2.1674* 0.2476 6.5944*** 17.4784*** 0.5312 1.2685 5.7980**

Equity does not GC CDS 21.3436*** 24.0015*** 0.3464 13.6689*** 19.2754*** 0.4086 1.8387 1.7766 0.5305 7.7716*** 0.8140 4.9899*** 13.1571*** 32.3894*** 1.7168

CDS do not GC Bonds 48.4333*** 2.1050 17.9699*** 57.8851*** 8.1060*** 0.0340 28.3250*** 14.6027*** 15.4171*** 0.8861 29.0911*** 19.5492*** 6.1873** 0.7460 60.3745***

Equity does not GC Bonds 2.6826 0.0897 0.3230 0.1995 29.5166*** 2.8554* 1.1968 0.0014 0.3511 3.2110* 2.5425* 6.8371*** 0.1058 0.2742 13.8855***

CDS do not GC Equity 0.2759 0.0211 7.2167*** 0.4478 0.2360 0.7075 19.8907*** 3.4809* 7.9791*** 18.3692*** 3.6179** 4.1459*** 53.6994*** 13.4533*** 2.2815

Bonds do not GC Equity 0.0837 0.8762 1.4135 1.2749 0.6549 10.0106*** 0.0034 1.3550 0.5363 0.7952 1.7609 4.7950*** 0.2085 0.1511 0.4257

(c) Country Brazil Chile Colombia Mexico Peru Czech Hungary Poland South Africa China Indonesia Malaysia Philippines Thailand Turkey

Bonds do not GC CDS 0.1136 1.6662 0.2083 7.6304*** 0.0067 5.9567** 2.1912 2.5428 0.9447 0.2077 11.1772*** 20.2706*** 0.2107 0.4829 5.6362**

Liquidity does not GC CDS 0.1387 0.0077 0.0402 0.4826 0.0819 0.0912 0.3810 0.2976 0.0288 0.5090 0.1948 0.6631 0.3058 0.7293 0.1327

CDS do not GC Bonds 68.0183*** 2.4937 26.5325*** 68.9720*** 25.2658*** 1.6438 36.5323*** 20.9423*** 44.3421*** 0.0084 30.0620*** 16.0128*** 6.3823 ** 0.5351 45.1004***

Liquidity does not GC Bonds 0.0836 0.0133 0.4472 0.1390 1.2739 0.0066 1.2900 1.0454 1.1643 0.1484 0.0598 0.9939 0.6439 0.2827 0.2989

CDS do not GC Liquidity 0.1903 0.0003 1.7050 1.1085 0.1344 0.0084 0.3552 0.0278 0.5514 0.2016 1.4030 0.3380 0.5965 0.9947 0.0270

Bonds do not GC Liquidity 0.4060 2.0149 1.1603 0.4741 0.0335 0.1522 1.7498 0.2310 0.1787 1.9840 0.3478 0.5040 0.1181 2.3641 0.2327

26

Table 7: Price discovery: VECM with CDS and bond spreads.

Peru [1, -1] GG aic [1, -1] GG bic Johansen GG aic Johansen GG bic Dols GG aic Dols GG bic [1, -1] GG hq Johansen GG hq Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq Czech [1, -1] GG aic [1, -1] GG bic Johansen GG aic Johansen GG bic Dols GG aic Dols GG bic [1, -1] GG hq Johansen GG hq Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq Hungary [1, -1] GG aic [1, -1] GG bic Johansen GG aic Johansen GG bic Dols GG aic Dols GG bic [1, -1] GG hq Johansen GG hq Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq Poland [1, -1] GG aic [1, -1] GG bic Johansen GG aic Johansen GG bic Dols GG aic Dols GG bic [1, -1] GG hq Johansen GG hq Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq gg 1 na 1 na 0 na na na na 1 na na gg 1 1 1 1 0.89227 1 1 1 1 0.9887 1 1 gg 1 1 na 1 0.3996 1 1 1 1 0.65239 1 1 gg na 1 na 1 na 1 na na na na 1 na lambda1 0.0170** na -1.9942*** na -0.0260*** na na na na -2.0384*** na na lambda1 0.0029 0.0058 0.0063 0.2729 -0.0024 0.0035 0.0071 0.6134 0.0067 -0.0102 0.6431 0.8293** lambda1 0.0016 0.0138 na 1.2630 -0.0044 0.0005 0.0182* 1.6256** 0.0019 0.7899 -0.3073 -0.9618 lambda1 na 0.0020 na 0.6964 na 0.0014 na na na na -0.2581 na lambda2 0.0332*** na -2.4033*** na -0.0064 na na na na -2.3933*** na na lambda2 0.0203*** 0.0223*** 0.8929*** 0.8622*** 0.0202*** 0.0188*** 0.0186*** 1.0945*** 0.0180*** 0.8932*** 1.2257*** 1.0802*** lambda2 0.0145** 0.0260*** na 2.2191*** 0.0030 0.0079** 0.0212*** 1.7701*** 0.0063* -1.4825*** -3.5744*** -2.8201*** lambda2 na 0.0142*** na 1.9095*** na 0.0125** na na na na -1.1045*** na lambda2 - lambda1 0.0162 na -0.4091 na 0.0196 na na na na -0.3549 na na lambda2 - lambda1 0.0174 0.0165 0.8866 0.5894 0.0226 0.0153 0.0114 0.4811 0.0113 0.9034 0.5827 0.2509 lambda2 - lambda1 0.0129 0.0122 na 0.9561 0.0074 0.0074 0.0031 0.1446 0.0044 -2.2725 -3.2671 -1.8584 lambda2 - lambda1 na 0.0122 na 1.2132 na 0.0111 na na na na -0.8464 na has1 0.9836 na 0.8264 na 0.0716 na na na na 0.8121 na na has1 0.9910 0.9930 1.0000 0.9914 0.9911 1.0000 0.9832 0.9397 0.9851 0.9997 0.9466 0.8647 has1 0.9638 0.9778 na 0.9695 0.3296 0.9755 0.9069 0.8842 0.9986 0.6732 0.9769 0.9998 has1 na 0.9971 na 0.9361 na 0.9990 na na na na 0.9807 na has2 0.7966 na 0.5463 na 0.0074 na na na na 0.5288 na na has2 0.9911 0.9712 1.0000 0.9575 0.9932 0.9850 0.9387 0.8744 0.9421 0.9999 0.8882 0.7820 has2 0.9940 0.8906 na 0.8748 0.5967 0.9983 0.7467 0.7148 0.9639 0.8991 0.9974 0.9580 has2 na 0.9852 na 0.9059 na 0.9902 na na na na 0.9590 na mean has 0.8901 na 0.6863 na 0.0395 na na na na 0.6704 na na mean has 0.9911 0.9821 1.0000 0.9745 0.9921 0.9925 0.9609 0.9071 0.9636 0.9998 0.9174 0.8233 mean has 0.9789 0.9342 na 0.9221 0.4632 0.9869 0.8268 0.7995 0.9812 0.7862 0.9871 0.9789 mean has na 0.9912 na 0.9210 na 0.9946 na na na na 0.9698 na

27

Table 8: Price discovery: VECM with CDS and bond spreads (contd).
Indonesia [1, -1] GG aic [1, -1] GG bic Johansen GG aic Johansen GG bic Dols GG aic Dols GG bic [1, -1] GG hq Johansen GG hq Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq Malaysia [1, -1] GG aic [1, -1] GG bic Johansen GG aic Johansen GG bic Dols GG aic Dols GG bic [1, -1] GG hq Johansen GG hq Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq Philippines [1, -1] GG aic [1, -1] GG bic Johansen GG aic Johansen GG bic Dols GG aic Dols GG bic [1, -1] GG hq Johansen GG hq Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq Thailand [1, -1] GG aic [1, -1] GG bic Johansen GG aic Johansen GG bic Dols GG aic Dols GG bic [1, -1] GG hq Johansen GG hq Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq Turkey [1, -1] GG aic [1, -1] GG bic Johansen GG aic Johansen GG bic Dols GG aic Dols GG bic [1, -1] GG hq Johansen GG hq Dols GG hq Joh const GG aic Joh const GG bic Joh const GG hq gg 0 1 0 0.98264 1 0.91834 1 1 0.94803 0 0.90216 na gg 1 1 1 1 1 1 1 1 1 na na na gg na 0.19539 na 0.2139 na 0.24876 0.1732 0.19251 0.23415 na 0.24406 0.22034 gg na na na na na na na na na 1 na na gg na 1 na 1 na 1 1 1 1 na 1 1 lambda1 0.0636*** 0.0153 -5.1468*** -0.0763 0.0965*** -0.0101 0.0179 0.2383 -0.006 5.1749*** 0.4570 na lambda1 0.0310** 0.0253** 1.4854** 1.4823** 0.0125 -0.0281** 0.0253** 1.4823** -0.0281** na na na lambda1 na -0.0989*** na -5.9996*** na -0.0757*** -0.1025*** -5.9728*** -0.0722*** na -6.1917*** -6.1868*** lambda1 na na na na na na na na na 1.1580* na na lambda1 na 0.0021 na 2.0396** na 0.0013 0.0021 2.0396** 0.0013 na 1.4416 1.4416 lambda2 0.0459*** 0.0264* -3.0876*** 4.3239*** 0.1500*** 0.1141*** 0.0285* 4.2110*** 0.1092*** 3.0486*** -4.2142*** na lambda2 0.1284*** 0.0947*** 5.2356*** 5.0983*** 0.0626*** -0.0838*** 0.0947*** 5.0983*** -0.0838*** na na na lambda2 na 0.0240* na 1.6325* na 0.0251** 0.0215 1.4239* 0.0221* na 1.9991** 1.7485** lambda2 na na na na na na na na na 2.1671*** na na lambda2 na 0.0251** na 3.9111*** na 0.0233** 0.0251** 3.9111*** 0.0233** na 4.0112*** 4.0112*** lambda2 - lambda1 -0.0177 0.0110 2.0592 4.4002 0.0536 0.1243 0.0107 3.9727 0.1152 -2.1262 -4.6712 na lambda2 - lambda1 0.0974 0.0695 3.7502 3.6160 0.0501 -0.0557 0.0695 3.6160 -0.0557 na na na lambda2 - lambda1 na 0.1229 na 7.6322 na 0.1008 0.1239 7.3967 0.0943 na 8.1908 7.9353 lambda2 - lambda1 na na na na na na na na na 1.009 na na lambda2 - lambda1 na 0.0230 na 1.8716 na 0.0220 0.0230 1.8716 0.0220 na 2.5695 2.5695 has1 0.3750 0.7725 0.2666 0.7356 0.9452 0.6886 0.9970 0.7875 0.7151 0.2228 0.6751 na has1 0.9170 0.9217 0.8917 0.8883 0.9843 0.8197 0.9217 0.8883 0.8197 na na na has1 na 0.0729 na 0.0889 na 0.1281 0.0560 0.0705 0.1129 na 0.1188 0.0948 has1 na na na na na na na na na 0.92042 na na has1 na 0.7122 na 0.9862 na 0.6910 0.7122 0.9862 0.6910 na 0.9099 0.9099 has2 0.0198 0.7400 0.0003 0.9998 0.5166 0.9959 0.7109 0.9982 0.9984 0.0059 0.9940 na has2 0.6090 0.6308 0.5909 0.5769 0.7747 0.4779 0.6308 0.5769 0.4779 na na na has2 na 0.1216 na 0.1447 na 0.1884 0.1016 0.1234 0.1719 na 0.1871 0.1590 has2 na na na na na na na na na 0.84904 na na has2 na 0.9956 na 0.7665 na 0.9981 0.9956 0.7665 0.9981 na 0.8985 0.8985 mean has 0.1974 0.7562 0.1334 0.8677 0.7309 0.8422 0.8539 0.8928 0.8568 0.1143 0.8346 na mean has 0.7630 0.7762 0.7413 0.7326 0.8795 0.6488 0.7762 0.7326 0.6488 na na na mean has na 0.0973 na 0.1168 na 0.1582 0.0788 0.0969 0.1424 na 0.1530 0.1269 mean has na na na na na na na na na 0.88473 na na mean has na 0.8539 na 0.8763 na 0.8446 0.8539 0.8763 0.8446 na 0.9042 0.9042

28

Table 9: Price discovery: VECM with CDS, bond spreads and equity indexes.
Brazil Johansen GG aic Joh const GG aic Chile Johansen GG aic Joh const GG aic Colombia Johansen GG aic Joh const GG aic Mexico Johansen GG aic Joh const GG aic Peru Johansen GG aic Joh const GG aic Czech Johansen GG aic Joh const GG aic Hungary Johansen GG aic Joh const GG aic Poland Johansen GG aic Joh const GG aic South Africa Johansen GG aic Joh const GG aic China Johansen GG aic Joh const GG aic Indonesia Johansen GG aic Joh const GG aic Malaysia Johansen GG aic Joh const GG aic Philippines Johansen GG aic Joh const GG aic Thailand Johansen GG aic Joh const GG aic Turkey Johansen GG aic Joh const GG aic gg 0 0 gg 0 0 gg 1 1 gg 0.36225 0.33272 gg 1 1 gg 0 0.10096 gg 1 0 gg 1 1 gg 0 1 gg 0.78490 0.74346 gg 0 0 gg 1 1 gg 1 0.18784 gg 0.26354 0 gg 1 0.97807 lambda1 -2.1797*** 1.6045*** lambda1 -1.1940*** 0.9551*** lambda1 -0.5114 0.409 lambda1 -0.6029 0.6212 lambda1 -2.2232*** -2.2360*** lambda1 0.6465 -0.4392 lambda1 -1.9487** -1.2884* lambda1 -0.5577 0.6278 lambda1 -0.8599 0.7108 lambda1 0.5162 -0.6417 lambda1 -5.1547*** -0.6065 lambda1 -0.2838 0.4678 lambda1 0.4646 -1.3960** lambda1 -1.0506* -0.2333 lambda1 0.2421 -0.0197 lambda2 -1.8249*** 0.9970* lambda2 -0.5317 0.7986 lambda2 -1.1318 1.5518** lambda2 0.3425 -0.3097 lambda2 -2.8207*** -2.8293*** lambda2 0.3968 0.0493 lambda2 -1.3870*** -0.8756** lambda2 -1.5421*** 1.3022*** lambda2 -0.7868 1.0786* lambda2 -1.8836*** 1.8595*** lambda2 -3.1562*** -0.5994 lambda2 -0.5344 0.7809 lambda2 0.5216 0.3229 lambda2 0.3760 -0.1415 lambda2 0.7827 0.8776 lambda2 - lambda1 0.3548 -0.6074 lambda2 - lambda1 0.6624 -0.1564 lambda2 - lambda1 -0.6204 1.1428 lambda2 - lambda1 0.9454 -0.9309 lambda2 - lambda1 -0.5974 -0.5933 lambda2 - lambda1 -0.2497 0.4886 lambda2 - lambda1 0.5618 0.4128 lambda2 - lambda1 -0.9844 0.6743 lambda2 - lambda1 0.0732 0.3677 lambda2 - lambda1 -2.3999 2.5012 lambda2 - lambda1 1.9985 0.0071 lambda2 - lambda1 -0.2506 0.3132 lambda2 - lambda1 0.0570 1.7188 lambda2 - lambda1 1.4266 0.0918 lambda2 - lambda1 0.5406 0.8973 has1 0.6229 0.3818 has1 0.0964 0.2839 has1 0.9991 0.9462 has1 0.1964 0.1689 has1 0.9752 0.9744 has1 0.5452 0.0276 has1 0.6894 0.6679 has1 0.9332 0.8789 has1 0.7993 0.9979 has1 0.7838 0.9012 has1 0.2539 0.8542 has1 0.4878 0.5038 has1 0.6537 0.0533 has1 0.1404 0.3991 has1 0.9059 0.6583 has2 0.1165 0.0100 has2 0.0552 0.2188 has2 0.8084 0.9386 has2 0.7212 0.6887 has2 0.4966 0.4943 has2 0.4045 0.0958 has2 0.5285 0.4965 has2 0.9133 0.8533 has2 0.2614 0.6665 has2 0.8694 0.8119 has2 0.0001 0.3568 has2 0.1864 0.1298 has2 0.5448 0.1166 has2 0.2549 0.2671 has2 0.9164 0.9997 mean has 0.3697 0.1959 mean has 0.0758 0.2514 mean has 0.9037 0.9424 mean has 0.4588 0.4288 mean has 0.7359 0.7344 mean has 0.4748 0.0617 mean has 0.6089 0.5822 mean has 0.9232 0.8661 mean has 0.5303 0.8322 mean has 0.8266 0.8566 mean has 0.1270 0.6055 mean has 0.3371 0.3168 mean has 0.5993 0.0849 mean has 0.1976 0.3331 mean has 0.9112 0.8290

29

Table 10: Price discovery: VECM with CDS, bond spreads and liquidity proxy.
Brazil Johansen GG aic Joh const GG aic Chile Johansen GG Joh const GG Colombia Johansen GG Joh const GG aic aic aic aic gg 1 0 gg 1 1 gg 1 1 gg 1 0 gg 1 1 gg 1 0.31978 gg 0 1 gg 0 0 gg 1 1 gg 1 1 gg 0 0 gg 1.56369 0.27659 gg 0.01010 0.13599 gg 0.06941 0.49218 gg 1 0.12490 lambda1 3.8513*** 0.6276** lambda1 1.1633*** -0.3333 lambda1 0.2170 -0.9610* lambda1 2.0077** -0.9785** lambda1 3.0089*** -1.2114*** lambda1 0.81247 -0.6413* lambda1 3.7497*** 0.0638 lambda1 1.5752*** 0.4149 lambda1 2.8864*** -1.5828*** lambda1 0.8288* -0.4069 lambda1 -5.7058*** -1.6299* lambda1 2.6979*** -1.4546** lambda1 7.6836*** -2.0513*** lambda1 3.0580*** 0.0970 lambda1 -3.9383*** -0.4847 lambda2 4.6590*** 0.5261** lambda2 2.2471*** -1.2338*** lambda2 3.5036*** -1.8439*** lambda2 3.4892*** -0.9353*** lambda2 4.4348*** -1.1270*** lambda2 0.8373** 0.3015 lambda2 2.4294*** 0.2979 lambda2 1.4151*** 0.0577 lambda2 5.0084*** -1.9353*** lambda2 3.4014*** -2.8101*** lambda2 -2.7183** -1.5363* lambda2 7.4839*** 0.5562 lambda2 -0.0784 1.2318** lambda2 -0.2281 -0.0941 lambda2 -5.7503*** 0.0692 lambda2 - lambda1 0.8077 -0.1015 lambda2 - lambda1 1.0838 -0.9006 lambda2 - lambda1 3.2866 -0.8829 lambda2 - lambda1 1.4815 0.0431 lambda2 - lambda1 1.4259 0.0844 lambda2 - lambda1 0.0248 0.9428 lambda2 - lambda1 -1.3203 0.2341 lambda2 - lambda1 -0.1600 -0.3572 lambda2 - lambda1 2.1221 -0.3526 lambda2 - lambda1 2.5726 -2.4033 lambda2 - lambda1 2.9875 0.0935 lambda2 - lambda1 4.7861 2.0108 lambda2 - lambda1 -7.7620 3.2831 lambda2 - lambda1 -3.2861 -0.1911 lambda2 - lambda1 -1.8120 0.5539 has1 0.9459 0.6944 has1 0.7323 0.9333 has1 0.8203 0.9973 has1 0.9871 0.9357 has1 0.9991 0.8443 has1 0.8005 0.2959 has1 0.6031 0.6912 has1 0.5195 0.0247 has1 0.9997 0.9394 has1 0.9081 0.9757 has1 0.1496 0.3093 has1 0.7577 0.0185 has1 0.0000139443 0.3248 has1 0.0090 0.5225 has1 0.9933 0.0120 has2 0.4458 0.1170 has2 0.6695 0.8860 has2 0.9972 0.7487 has2 0.8597 0.5306 has2 0.6599 0.2294 has2 0.6853 0.4351 has2 0.4331 0.9821 has2 0.5067 0.0144 has2 0.7442 0.4795 has2 0.8792 0.9541 has2 0.0227 0.3279 has2 0.4345 0.2495 has2 0.0089 0.4159 has2 0.0771 0.6964 has2 0.6015 0.4599 mean has 0.6959 0.4057 mean has 0.7009 0.9097 mean has 0.9087 0.8730 mean has 0.9234 0.7331 mean has 0.8295 0.5368 mean has 0.7429 0.3655 mean has 0.5181 0.8366 mean has 0.5131 0.0195 mean has 0.8720 0.7095 mean has 0.8936 0.9649 mean has 0.0861 0.3186 mean has 0.5961 0.1340 mean has 0.0089 0.3703 mean has 0.0430 0.6094 mean has 0.7974 0.2360

Mexico Johansen GG aic Joh const GG aic Peru Johansen GG aic Joh const GG aic Czech Johansen GG aic Joh const GG aic Hungary Johansen GG aic Joh const GG aic Poland Johansen GG aic Joh const GG aic South Africa Johansen GG aic Joh const GG aic China Johansen GG aic Joh const GG aic Indonesia Johansen GG aic Joh const GG aic Malaysia Johansen GG aic Joh const GG aic Philippines Johansen GG aic Joh const GG aic Thailand Johansen GG aic Joh const GG aic Turkey Johansen GG aic Joh const GG aic

30