Valuation differences between credit default swap and corporate bond markets

This paper quantifies and explains the valuation differences between credit default swaps (CDSs) and corporate bonds from a sample of European investment-grade firms. Based on all information gained through the calibration of a stochastic intensity credit model to the time series of the issuer's CDS curve, we define a new corporate-bond-specific measure of the valuation difference. Our results show that, on average, risk premiums implied in corporate bonds exceed those in CDS markets by a much smaller extent than found in previous studies. Using panel data analysis, we detect a cross-sectional influence of bond liquidity measures and find a significant impact of the general level of credit risk on the time series variation of the valuation difference.