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Do CDS spread determinants affect the probability of default? A study on the EU banks

Alessandra Ortolano () and Eliana Angelini
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Alessandra Ortolano: G. d’Annunzio University, Department of Economic Studies

Bank i Kredyt, 2020, vol. 51, issue 1, 1-32

Abstract: The paper is an investigation of the principal variables that have affected the EU banks’ credit risk over the decade 2006–2016. In this context we adopt panel Tobit regressions in order to infer our object of analysis on the most significant CDS spread determinants illustrated by recent literature. In fact, the CDS spread should give a measure of credit risk, expressed by the probability of default. In accordance with the insertion of balance sheet, macroeconomic and market variables, we estimate the probability of default through a two-equation Merton model. Our results are analogous with the main trend of CDS spread determinants over time and contribute to continuing to consider the price of credit default swaps as a good indicator of banks’ creditworthiness.

Keywords: probability of default; banks; structural models; CDS spread (search for similar items in EconPapers)
JEL-codes: G10 G21 G33 (search for similar items in EconPapers)
Date: 2020
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