Through a long-period analysis of the inter-temporal relations between the
French markets for credit default swaps (CDS), shares and bonds between 2001
and 2008, this article shows how a financial innovation like CDS could heighten
financial instability. After describing the operating principles of credit
derivatives in general and CDS in particular, we construct two difference VAR
models on the series: the share return rates, the variation in bond spreads and
the variation in CDS spreads for thirteen French companies, with the aim of
bringing to light the relations between these three markets. According to these
models, there is indeed an interdependence between the French share, CDS and
bond markets, with a strong influence of the share market on the other two.
This interdependence increases during periods of tension on the markets
(2001-2002, and since the summer of 2007).Comment: 2