Are the sovereign CDS premia sound estimators of the stock market returns?Evidence from the Eurozone

  1. Ana Navarrete Wic 1
  2. Filippo Di Pietro 2
  3. José Luis Martín Marín 1
  1. 1 Universidad Pablo de Olavide

    Universidad Pablo de Olavide

    Sevilla, España


  2. 2 Universidad de Sevilla

    Universidad de Sevilla

    Sevilla, España


Revista de métodos cuantitativos para la economía y la empresa

ISSN: 1886-516X

Year of publication: 2018

Volume: 25

Pages: 130-155

Type: Article

More publications in: Revista de métodos cuantitativos para la economía y la empresa


In this paper, we explore the interconnection and existing relationships between the Sovereign Credit Default Swaps (henceforth, CDS) and the stock markets of the main European countries. Thus, the goal of this paper is to test if the CDS premia can predict the stock market returns of the most relevant economies within the Eurozone, so that, they serve as advanced indicators like mechanisms of price transmission. For this purpose, we apply the Granger Causality test to analyze ten main European stock markets from 2004 to 2016 by using daily data. Our hypothesis is proved to work for the largest economies with liquid CDS markets, whereas the transmission mechanism between CDS and stock prices is not so evident for the smallest ones.

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