Changes In Credit Conditions Research Articles

An Empirical Comparison of Credit Spreads between the Bond Market and the Credit Default Swap Market

This paper compares the pricing of credit risk in the bond market and the fast-growing credit default swap (CDS) market. The cointegration test confirms that the theoretical parity relationship between the two credit spreads holds as a long-run equilibrium condition. Nevertheless, substantial deviation from the parity can arise in the short run. The panel data study and the VECM analysis both suggest that the deviation is largely due to the higher responsiveness of CDS premia to changes in credit conditions. Moreover, it exhibits a certain degree of persistence in that only 10% of price discrepancies can be removed within a business day.

Interest Rates and the Sectoral Behavior of the Residential Mortgage Market: A Theoretical Model

In recent literature, there has been some discussion regarding the behavioral difference of the conventional and government underwritten (FHA and VA) sectors of the residential mortgage market. Most of the discussion has been centered on the manner in which the two sectors respond to changes in credit conditions and alternative market interest rates. The differential behavior of the conventional and government underwritten mortgage rates has played a significant role in this discussion.