Sovereign and Bank CDS Spreads: Two Sides of the Same Coin?

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Title: Sovereign and Bank CDS Spreads: Two Sides of the Same Coin?
Authors: Avino, Davide
Cotter, John
Permanent link: http://hdl.handle.net/10197/7028
Date: 1-Sep-2014
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.
Funding Details: 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
Keywords: Credit default swap spreadsPrice discoveryInformation flowFinancial crisisBanksSovereign riskBank capitalContingent capital
DOI: 10.1016/j.intfin.2014.05.007
Language: en
Status of Item: Peer reviewed
Appears in Collections:FMC² Research Collection

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