Is Thailand’s credit default swap market linked to bond and stock markets? Evidence from the term structure of credit spreads

Abstract

When the term structure of credit spreads is used in a panel vector autoregression model, Granger causality tests provide strong evidence of bi-directional relationships among CDS, bond and stock markets. This study argues that extant research using only a 5-year credit spread tends to understate intermarket linkages since in practice investors are able to trade credit risk over the entire term structure of credit spreads. Interestingly, this study produces new empirical evidence that the term structure of CDS-bond basis displays a monotonically increasing trajectory. As the maturity lengthens, the arbitrage opportunity of companies with negative (positive) CDS-bond basis decreases (increases).