Type

Journal Article

Authors

John Cotter
Davide Avino

Subjects

Economics

Topics
price discovery financial crisis credit default swap spreads banks g12 bank capital g01 sovereign risk g20 information flow contingent capital g14

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 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.
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Ireland -> University College Dublin -> FMC² Research Collection

Full list of authors on original publication

John Cotter, Davide Avino

Experts in our system

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