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Credit Derivatives and Loan Pricing

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Author Info

  • Norden, L.
  • Wagner, W.B.

    (Tilburg University, Tilburg Law and Economics Center)

Abstract

This paper examines the relationship between the new markets for credit default swaps (CDS) and the pricing of syndicated loans to U.S. corporates. We find that changes in CDS spreads have a significantly positive coefficient and explain about 25% of subsequent monthly changes in aggregate loan spreads during 2000-2005. Moreover, when compared to traditional loan pricing factors, they turn out to be the dominant determinant of loan spreads. In particular, they explain loan rates much better than same rated bonds. This suggests that, even though CDS and bond markets may equally price market credit risk, a substantial part of CDS prices additionally contains loan-specific information. We also find that, over time, new information from CDS markets is incorporated into loans faster, but information from other markets is not. We argue that this indicates that the markets for CDS influence banks’ loan pricing behavior and thus have an impact on actual financing decisions in the economy.

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Bibliographic Info

Paper provided by Tilburg University, Tilburg Law and Economic Center in its series Discussion Paper with number 2007-015.

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Date of creation: 2007
Date of revision:
Handle: RePEc:dgr:kubtil:2007015

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Web page: http://www.tilburguniversity.nl/tilec/

Related research

Keywords: Syndicated Lending; Loan Rates; Credit Derivatives; Credit Markets; Credit Spreads;

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References

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  1. Marsh , Ian W, 2006. "The effect of lenders’ credit risk transfer activities on borrowing firms’ equity returns," Research Discussion Papers 31/2006, Bank of Finland.
  2. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
  3. Roberto Blanco & Simon Brennan & Ian W Marsh, 2004. "An empirical analysis of the dynamic relationship between investment-grade bonds and credit default swaps," Bank of England working papers 211, Bank of England.
  4. Amir Sufi, 2007. "Information Asymmetry and Financing Arrangements: Evidence from Syndicated Loans," Journal of Finance, American Finance Association, vol. 62(2), pages 629-668, 04.
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  6. Dennis, Steven A. & Mullineaux, Donald J., 2000. "Syndicated Loans," Journal of Financial Intermediation, Elsevier, vol. 9(4), pages 404-426, October.
  7. Angbazo, Lazarus A. & Mei, Jianping & Saunders, Anthony, 1998. "Credit spreads in the market for highly leveraged transaction loans," Journal of Banking & Finance, Elsevier, vol. 22(10-11), pages 1249-1282, October.
  8. Acharya, Viral V & Johnson, Tim, 2005. "Insider Trading in Credit Derivatives," CEPR Discussion Papers 5180, C.E.P.R. Discussion Papers.
  9. Norden, Lars & Weber, Martin, 2004. "Informational Efficiency of Credit Default Swap and Stock Markets: The Impact of Credit Rating Announcements," CEPR Discussion Papers 4250, C.E.P.R. Discussion Papers.
  10. Maretno Harjoto & Donald Mullineaux & Ha-Chin Yi, 2006. "A Comparison of Syndicated Loan Pricing at Investment and Commercial Banks," Financial Management, Financial Management Association, vol. 35(4), Winter.
  11. Houweling, Patrick & Vorst, Ton, 2005. "Pricing default swaps: Empirical evidence," Journal of International Money and Finance, Elsevier, vol. 24(8), pages 1200-1225, December.
  12. Alan Morrison, 2000. "Credit Derivatives, Disintermediation and Investment Decisions," OFRC Working Papers Series 2001fe01, Oxford Financial Research Centre.
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  16. Roberto Blanco & Simon Brennan & Ian W. Marsh, 2005. "An Empirical Analysis of the Dynamic Relation between Investment-Grade Bonds and Credit Default Swaps," Journal of Finance, American Finance Association, vol. 60(5), pages 2255-2281, October.
  17. Thomas, Hugh & Wang, Zhiqiang, 2004. "The integration of bank syndicated loan and junk bond markets," Journal of Banking & Finance, Elsevier, vol. 28(2), pages 299-329, February.
  18. Hull, John & Predescu, Mirela & White, Alan, 2004. "The relationship between credit default swap spreads, bond yields, and credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2789-2811, November.
  19. Hirtle, Beverly, 2009. "Credit derivatives and bank credit supply," Journal of Financial Intermediation, Elsevier, vol. 18(2), pages 125-150, April.
  20. Goderis, B.V.G. & Marsh, I. & Vall Castello, J. & Wagner, W.B., 2006. "Bank Behavior with Access to Credit Risk Transfer Markets," Discussion Paper 2006-100, Tilburg University, Center for Economic Research.
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Citations

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Cited by:
  1. Ilhyock Shim & Haibin Zhu, 2010. "The impact of CDS trading on the bond market: evidence from Asia," BIS Working Papers 332, Bank for International Settlements.
  2. Ismailescu, Iuliana & Kazemi, Hossein, 2010. "The reaction of emerging market credit default swap spreads to sovereign credit rating changes," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 2861-2873, December.
  3. Stefan Arping, 2012. "Credit Protection and Lending Relationships," Tinbergen Institute Discussion Papers 12-142/IV/DSF48, Tinbergen Institute.
  4. Xin Huang & Hao Zhou & Haibin Zhu, 2009. "A Framework for Assessing the Systemic Risk of Major Financial Institutions," BIS Working Papers 281, Bank for International Settlements.
  5. Xin Huang & Hao Zhou & Haibin Zhu, 2010. "Assessing the systemic risk of a heterogeneous portfolio of banks during the recent financial crisis," BIS Working Papers 296, Bank for International Settlements.
  6. Imbierowicz, Björn & Wahrenburg, Mark, 2013. "Wealth transfer effects between stockholders and bondholders," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(1), pages 23-43.
  7. Shim, Ilhyock & Zhu, Haibin, 2014. "The impact of CDS trading on the bond market: Evidence from Asia," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 460-475.
  8. Arping, Stefan, 2014. "Credit protection and lending relationships," Journal of Financial Stability, Elsevier, vol. 10(C), pages 7-19.
  9. : Gi H. Kim, 2013. "Credit Default Swaps, Strategic Default, and the Cost of Corporate Debt," Working Papers wpn13-12, Warwick Business School, Finance Group.
  10. Galil, Koresh & Soffer, Gil, 2011. "Good news, bad news and rating announcements: An empirical investigation," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3101-3119, November.
  11. Bosch, Oliver & Steffen, Sascha, 2011. "On syndicate composition, corporate structure and the certification effect of credit ratings," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 290-299, February.
  12. Huang, Alex YiHou & Cheng, Chiao-Ming, 2013. "Information risk and credit contagion," Finance Research Letters, Elsevier, vol. 10(3), pages 116-123.
  13. Xin Huang & Hao Zhou & Haibin Zhu, 2012. "Systemic Risk Contributions," Journal of Financial Services Research, Springer, vol. 42(1), pages 55-83, October.
    • Xin Huang & Hao Zhou & Haibin Zhu, 2011. "Systemic risk contributions," BIS Papers chapters, in: Bank for International Settlements (ed.), Macroprudential regulation and policy, volume 60, pages 36-43 Bank for International Settlements.
  14. Forte, Santiago & Peña, Juan Ignacio, 2009. "Credit spreads: An empirical analysis on the informational content of stocks, bonds, and CDS," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2013-2025, November.
  15. Lamont Black & Ricardo Correa & Xin Huang & Hao Zhou, 2013. "The systemic risk of European banks during the financial and sovereign debt crises," International Finance Discussion Papers 1083, Board of Governors of the Federal Reserve System (U.S.).
  16. Stefan Arping, 2012. "Credit Protection and Lending Relationships," Tinbergen Institute Discussion Papers 12-142/IV/DSF48, Tinbergen Institute.
  17. Das, Sanjiv & Kalimipalli, Madhu & Nayak, Subhankar, 2014. "Did CDS trading improve the market for corporate bonds?," Journal of Financial Economics, Elsevier, vol. 111(2), pages 495-525.
  18. Ashcraft, Adam B. & Santos, João A.C., 2009. "Has the CDS market lowered the cost of corporate debt?," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 514-523, May.

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