Sovereign and bank CDS spreads: two sides of the same coin?

Davide Avino and John Cotter

MPRA Paper from University Library of Munich, Germany

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; information flow; financial crisis; banks; sovereign risk; bank capital (search for similar items in EconPapers)
JEL-codes: D8 D80 G1 G12 G14 G20 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-eec
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (30)

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Related works:
Journal Article: 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:pra:mprapa:55208

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