Credit default swaps as indicators of bank financial distress
Thomas Conlon and
John Cotter ()
Journal of International Money and Finance, 2019, vol. 94, issue C, 132-139
We examine whether CDS contracts written on individual banks are effective leading indicators of bank financial distress during a period of systemic bank crisis. Changes in CDS spreads are found to yield a robust signal of failure across a set of European and US banks, in keeping with indirect market discipline. Furthermore, changes in CDS spreads provide information about the condition of banks which supplements that available from equity markets and contained in accounting metrics. Our findings hold out-of-sample, for various cohorts, for subordinated CDS spreads, for idiosyncratic changes in CDS and are robust to the use of alternative measures of bank distress, including rating downgrades and accounting risk.
Keywords: Bank failure; Market discipline; Credit default swap; CDS (search for similar items in EconPapers)
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Working Paper: Credit Default Swaps as Indicators of Bank financial Distress (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:94:y:2019:i:c:p:132-139
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