Credit derivatives and loan pricing
This paper examines the relation between the new markets for credit default swaps (CDS) and banks' pricing of syndicated loans to US 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 explanatory 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 CDS prices contain, beyond general credit risk, to a substantial extent information relevant for bank lending. We also find that, over time, new information from CDS markets is faster incorporated into loans, but information from other markets is not. Overall, our results indicate that the markets for CDS have gained an important role for banks.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Acharya, Viral V & Johnson, Tim, 2005.
"Insider Trading in Credit Derivatives,"
CEPR Discussion Papers
5180, C.E.P.R. Discussion Papers.
- Edwin J. Elton, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, 02.
- Alan Morrison, 2000. "Credit Derivatives, Disintermediation and Investment Decisions," OFRC Working Papers Series 2001fe01, Oxford Financial Research Centre.
- Merton, Robert C., 1973.
"On the pricing of corporate debt: the risk structure of interest rates,"
684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
- 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.
- 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.
- Norden, Lars & Weber, Martin, 2004. "Informational efficiency of credit default swap and stock markets: The impact of credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2813-2843, November.
- 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.
- Maretno Harjoto & Donald J. Mullineaux & Ha-Chin Yi, 2006. "A Comparison of Syndicated Loan Pricing at Investment and Commercial Banks," Financial Management, Financial Management Association International, vol. 35(4), pages 49-70, December.
- Francis A. Longstaff & Sanjay Mithal & Eric Neis, 2004.
"Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit-Default Swap Market,"
NBER Working Papers
10418, National Bureau of Economic Research, Inc.
- Francis A. Longstaff & Sanjay Mithal & Eric Neis, 2005. "Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit Default Swap Market," Journal of Finance, American Finance Association, vol. 60(5), pages 2213-2253, October.
- Jeffery D Amato, 2005. "Risk aversion and risk premia in the CDS market," BIS Quarterly Review, Bank for International Settlements, December.
- 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.
- Philip E. Strahan, 1999. "Borrower risk and the price and nonprice terms of bank loans," Staff Reports 90, Federal Reserve Bank of New York.
- Steven Drucker & Manju Puri, 2005. "On the Benefits of Concurrent Lending and Underwriting," Journal of Finance, American Finance Association, vol. 60(6), pages 2763-2799, December.
- Hirtle, Beverly, 2009.
"Credit derivatives and bank credit supply,"
Journal of Financial Intermediation,
Elsevier, vol. 18(2), pages 125-150, April.
- 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.
- Goderis, B.V.G. & Marsh, I. & Vall Castello, J. & Wagner, W.B., 2006.
"Bank Behavior with Access to Credit Risk Transfer Markets,"
2006-100, Tilburg University, Center for Economic Research.
- Goderis, Benedikt & Marsh, Ian W. & Castello, Judit Vall & Wagner, Wolf, 2007. "Bank behaviour with access to credit risk transfer markets," Research Discussion Papers 4/2007, Bank of Finland.
- James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
- Haibin Zhu, 2006. "An Empirical Comparison of Credit Spreads between the Bond Market and the Credit Default Swap Market," Journal of Financial Services Research, Springer;Western Finance Association, vol. 29(3), pages 211-235, June.
- Houweling, P. & Vorst, A.C.F., 2003.
"Pricing default swaps: empirical evidence,"
Econometric Institute Research Papers
EI 2003-51, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
- Mark S. Carey & Gregory P. Nini, 2004. "Is the corporate loan market globally integrated? a pricing puzzle," International Finance Discussion Papers 813, Board of Governors of the Federal Reserve System (U.S.).
- Allen N. Berger & Gregory F. Udell, 1990.
"Some evidence on the empirical significance of credit rationing,"
Finance and Economics Discussion Series
105, Board of Governors of the Federal Reserve System (U.S.).
- Berger, Allen N & Udell, Gregory F, 1992. "Some Evidence on the Empirical Significance of Credit Rationing," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 1047-77, October.
- 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.
- Alan D. Morrison, 2005. "Credit Derivatives, Disintermediation, and Investment Decisions," The Journal of Business, University of Chicago Press, vol. 78(2), pages 621-648, March.
- 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.
- 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.
- Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
- Dennis, Steven A. & Mullineaux, Donald J., 2000. "Syndicated Loans," Journal of Financial Intermediation, Elsevier, vol. 9(4), pages 404-426, October.
When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:32:y:2008:i:12:p:2560-2569. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.