Market Integration between CDS and Equity markets: An Empirical Study on Pricing Discrepancies and Market Efficiency

Frederik Vibjerg Lauritsen & Vincent Winter

Student thesis: Master thesis


We contribute to the existing literature on market integration by analyzing influences on the degree of market integration between CDS and equity markets. Using a linear cointegration framework, we find market integration to be higher for European companies, investment grade companies, and during the Covid crisis. Further, we identify that the price discovery process between the stock and the CDS market is characterized by a leadlag relationship in which the CDS market significantly lags. The lagging role of the CDS market allows for one-week-ahead predictions of CDS spread levels and changes based on company-specific equity returns, option-implied volatility, and liquidity measures as well as macroeconomic indicators. Due to impediments to arbitrage, trading strategies based on mispricings in the CDS market appear unprofitable in our empirical tests. Lastly, our findings indicate that illiquidity in the single-name CDS market causes pricing discrepancies in relation to the equity market, which negatively affects the degree of market integration.

EducationsMSc in Advanced Economics and Finance, (Graduate Programme) Final Thesis
Publication date2022
Number of pages153
SupervisorsAnders Bjerre Trolle