Journal of Economics and Finance

, Volume 43, Issue 1, pp 1–26 | Cite as

Relation between Credit Default Swap Spreads and Stock Prices: A Non-linear Perspective

  • Miroslav MateevEmail author
  • Elena Marinova


In this study, we investigate the relation between credit risk, as implied in the credit default swaps (CDS), and market prices of Markit iTraxx Europe index companies. To test the hypothesis of co-integration between CDS and stock prices, we apply linear and non-linear models that allow for structural breaks. Using Johansen trace test of cointegration for a set of 109 pairs of CDS and stock prices of the companies included in the index, over the period of January 2012 to January 2016, we find that at the 10% level of significance, the null hypothesis of no cointegration is rejected for 26 pairs. We extend our analysis by allowing for a one-time structural break with unknown timing. Using alternative cointegration tests, we find that CDS and stock prices are cointegrated. More specifically, there are 47 companies in our sample for which CDS spreads and stock prices are cointegrated at the 10% level of significance. The existence of a long-run relation between CDS and stock prices of the European investment-grade companies is evidence for a possible transmission of shocks between the two segments of the financial market – the credit market (via CDS) and the stock market.


Credit default swap iTraxx index Cointegration Structural breaks Threshold 

JEL classification

C58 G10 G12 

Supplementary material

12197_2017_9423_MOESM1_ESM.docx (79 kb)
ESM 1 (DOCX 78 kb)


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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2017

Authors and Affiliations

  1. 1.American University in the EmiratesDubaiUnited Arab Emirates
  2. 2.EM Capital Consult Ltd.SofiaBulgaria

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