ON THE RELATIONSHIP BETWEEN SOVEREIGN BONDS AND CREDIT DEFAULT SWAPS IN PORTUGAL*

Abstract

This paper aims at identifying the relationship between government bonds spreads and credit default swaps premiums in Portugal for long and short maturities, covering a period that includes the beginning of the 2008 international financial crisis. We estimate Autoregressive Distributed Lag error correction models for the sub periods prior and after the moment crisis started. Results reveal the absence of cointegration over the sample period, with important differences prior and after 2010 in both maturities. There is no evidence of long-run relationship between both markets in both maturities, as the 2007 crisis has interrupted the long run relationship that was observed in the 5-year segment, and enacted a long run relationship in shorter maturities. The credit default swaps market performs a leading role on price determination in short- and long-run before the crisis but the role of the bond spread as a credit risk information has increased during the crisis.