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

John Cotter and Davide Avino
Additional contact information
Davide Avino: UCD School of Business, University College Dublin

No 201402, Working Papers from Geary Institute, University College Dublin

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 including 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, and find that both variables have an important price discovery role in the period preceding the financial crisis of 2007-2009. However, during the global financial crisis and the subsequent European sovereign debt crisis, sovereign CDS spreads dominate the price discovery process. Our findings suggest that, especially during crisis periods, sovereign CDS spreads incorporate more timely information on the default probability of European banks than their corresponding bank CDS spreads.

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 G01 G12 G14 G20 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2014-02-19
New Economics Papers: this item is included in nep-ban, nep-cba and nep-eec
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (30)

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http://www.ucd.ie/geary/static/publications/workingpapers/gearywp201402.pdf First version, 2014 (application/pdf)

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:ucd:wpaper:201402

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