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

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  • Avino, Davide
  • Cotter, John

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.

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  • Avino, Davide & Cotter, John, 2014. "Sovereign and bank CDS spreads: Two sides of the same coin?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 32(C), pages 72-85.
  • Handle: RePEc:eee:intfin:v:32:y:2014:i:c:p:72-85
    DOI: 10.1016/j.intfin.2014.05.007
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    Cited by:

    1. Augustin, Patrick & Subrahmanyam, Marti G. & Tang, Dragon Yongjun & Wang, Sarah Qian, 2014. "Credit Default Swaps: A Survey," Foundations and Trends(R) in Finance, now publishers, vol. 9(1-2), pages 1-196, December.
    2. repec:eee:dyncon:v:93:y:2018:i:c:p:131-153 is not listed on IDEAS
    3. Bijlsma, Melle & Vermeulen, Robert, 2016. "Insurance companies’ trading behaviour during the European sovereign debt crisis: Flight home or flight to quality?," Journal of Financial Stability, Elsevier, vol. 27(C), pages 137-154.
    4. Davide Avino & Thomas Conlon & John Cotter, 2016. "Credit Default Swaps as Indicators of Bank Financial Distress," Working Papers 201601, Geary Institute, University College Dublin.
    5. repec:pal:gpprii:v:43:y:2018:i:1:d:10.1057_s41288-017-0049-0 is not listed on IDEAS
    6. Neele Balke, 2018. "The Employment Cost of Sovereign Default," 2018 Meeting Papers 1256, Society for Economic Dynamics.
    7. Anne-Laure Delatte & Julien Fouquau & Richard Portes, 2017. "Regime-Dependent Sovereign Risk Pricing During the Euro Crisis," Review of Finance, European Finance Association, vol. 21(1), pages 363-385.
    8. Hassan, Kamrul & Hoque, Ariful & Gasbarro, Dominic, 2017. "Sovereign default risk linkage: Implication for portfolio diversification," Pacific-Basin Finance Journal, Elsevier, vol. 41(C), pages 1-16.
    9. Murad A.Bein & Gulcay TUNA, 2015. "Volatility Transmission and Dynamic Correlation Analysis between Developed and Emerging European Stock Markets during Sovereign Debt Crisis," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 61-80, June.
    10. repec:erc:cypepr:v:11:y:2017:i:2:p:19-62 is not listed on IDEAS
    11. repec:eee:intfin:v:58:y:2019:i:c:p:19-41 is not listed on IDEAS

    More about this item

    Keywords

    Credit default swap spreads; Price discovery; Financial crisis; Banks; Sovereign risk;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • 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
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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