Sovereign and bank CDS spreads: two sides of the same coin?

Avino, Davide and Cotter, John (2014): Sovereign and bank CDS spreads: two sides of the same coin?

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Credit default swap spreads; price discovery; information flow; financial crisis; banks; sovereign risk; bank capital
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D80 - General; G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G2 - Financial Institutions and Services > G20 - General

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