Sovereign and bank CDS spreads: Two sides of the same coin?
Davide Avino and
John Cotter
Journal of International Financial Markets, Institutions and Money, 2014, vol. 32, issue C, 72-85
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.
Keywords: Credit default swap spreads; Price discovery; Financial crisis; Banks; Sovereign risk (search for similar items in EconPapers)
JEL-codes: D8 G01 G12 G14 G20 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (30)
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Working Paper: Sovereign and bank CDS spreads: two sides of the same coin? (2014) 
Working Paper: Sovereign and bank CDS spreads: two sides of the same coin? (2014) 
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:32:y:2014:i:c:p:72-85
DOI: 10.1016/j.intfin.2014.05.007
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