Sovereign and bank CDS spreads: two sides of the same coin?
04 March 2014
26T13:54:18Z May 2014
This paper investigates the relationship between sovereign and bank CDS spreads with reference to their ability to convey timely signals on the default risk of European sovereign countries and their banking systems. By using a sample including six major European economies, we find that sovereign and bank CDS spreads are cointegrated variables at the country level. We then perform a more in-depth investigation of the underlying price discovery mechanisms, and find that both variables have an important price discovery role in the period preceding the financial crisis of 2007-2009. However, during the global financial crisis and the subsequent European sovereign debt crisis, sovereign CDS spreads dominate the price discovery process. Our findings suggest that, especially during crisis periods, sovereign CDS spreads incorporate more timely information on the default probability of European banks than their corresponding bank CDS spreads.
Science Foundation Ireland
Type of Material
University College Dublin. Geary Institute
UCD Geary Institute Discussion Paper Series
Status of Item
Not peer reviewed
This item is made available under a Creative Commons License