Type

Working Paper

Authors

Davide Avino
John Cotter

Subjects

Economics

Topics
banks bank capital sovereign risk global financial crisis price discovery financial crisis credit default swap spreads information flow

Sovereign and bank CDS spreads: two sides of the same coin? (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 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.
Collections Ireland -> University College Dublin -> Institutes and Centres
Ireland -> University College Dublin -> Geary Institute
Ireland -> University College Dublin -> Geary Institute Working Papers

Full list of authors on original publication

Davide Avino, John Cotter

Experts in our system

1
Davide Avino
University College Dublin
Total Publications: 3
 
2
John Cotter
University College Dublin
Total Publications: 93