Price Discovery of Credit Spreads for Japanese Mega-Banks: Subordinated Bond and CDS
AbstractThis paper empirically investigates the determinants of credit spreads for Japanese mega-banks with emphasis on comparing subordinated CDS spreads with the subordinated bond spreads from the viewpoint of price discovery in both credit markets. The main findings are summarized as follows. First, subordinated CDS and subordinated bond spreads are significantly cointegrated for most banks, and price discovery measures suggest that the CDS spread plays a more dominant role in price discovery than the bond spread. Second, although both CDS and bond spreads significantly react to the Japanese sovereign CDS spread, only the CDS spread reacts significantly to other financial market variables including its own volatility and equity return. Third, both spreads are responsive to the changes in fundamental accounting variables such as the capital? asset ratio and the nonperforming loan ratio. These accounting variables are likely to constitute common factors that are behind the cointegration relationship. Last, significant volatility spillovers are detected from the CDS to bond spreads. This result implies that new information flows more in this direction.
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Bibliographic InfoPaper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 07-E-06.
Date of creation: May 2007
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Subordinated Bond; Credit Default Swap; Japanese Banks; Price Discovery; Volatility Spillover; Bivariate GARCH;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-05-26 (All new papers)
- NEP-BAN-2007-05-26 (Banking)
- NEP-MST-2007-05-26 (Market Microstructure)
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