The Lead-Lag Relationship between the Stock Market and CDS Market in Korea Open Access

This study examines the lead-lag relationship between the stock market and CDS market in Korea using the firm-level data during 2006-2009. Our main findings can be summarized as follows. First, our empirical finding shows that stock returns Granger cause CDS spread changes for a larger number of firms than vice versa. Second, the sub-sample analysis reveals that while the stock market leads the CDS market in each sub-sample, the lead-lag relationship is more pronounced in the post-crisis period. Finally, our main findings remain the same even in the presence of controlling variables such as equity volatilities, absolute bid-ask spreads, and CDS premium on foreign exchange stabilization bonds issued by Korean government. In sum, consistent with the U. S. and U. K. evidence, it appears that the stock market leads the CDS market in Korea.