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Sovereign and Bank CDS Spreads: Two Sides of the Same Coin?
Author(s)
Date Issued
2014-09-01
Date Available
2015-09-15T10:01:35Z
Abstract
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 of 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. By decomposing the noise and speed of adjustment components of the price discovery, we find that both variables have an important price discovery role in the period 2004-2013. Most developed countries (Germany, Sweden) show a clear leading role for bank CDS spreads throughout the sample period, whereas most distressed European economies (Portugal and Spain) are governed by a leading role for their sovereign CDS spreads during both the sub-prime crisis and the subsequent European sovereign debt crisis.
Sponsorship
Science Foundation Ireland
Type of Material
Journal Article
Publisher
Elsevier
Journal
Journal of International Financial Markets, Institutions and Money
Volume
32
Start Page
72
End Page
85
Copyright (Published Version)
2014 Elsevier
Classification
G01
G12
G14
G20
D8
Language
English
Status of Item
Peer reviewed
This item is made available under a Creative Commons License
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