• Equity Derivatives

    Empirical interrelations among the CDS, bond and stock market

    The relationship between a company’s stock and its respective credit default swaps (CDS) and bonds is far from obvious. In a previous article, we have described the theoretical thoughts about jointly modeling debt and equity. Here, we want to give an overview about the empirical relationships between those markets and the resulting implications for capital structure arbitrage. Interestingly, we show that CDS react differently than bonds and that the sensitivity between the markets is affected by additional factors such as credit quality.