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Interpreting Recent Changes in the Credit Spreads of Japanese Banks


  • Jun Pan

    (Sloan School of Management, Massachusetts Institute of Technology (E-mail:

  • Kenneth J. Singleton

    (Graduate School of Business, Stanford University (E-mail:


This paper examines the recent period of relatively low credit spreads in Japan, with particular emphasis on the market fs assessments of the credit risks of large Japanese banks implicit in the prices of credit derivatives. We extract the market-price implied likelihood of a credit event in the future, and explore the nature of the default risk premiums underlying recent changes in bank bond and credit derivatives prices. We document substantial increases in the gjump-at- default h default risk premiums for the large Japanese banks examined during the early part of 2006. These patterns in risk premiums are related to the recent patterns in market indicators of global event risk, local equity market volatility, and an estimate of the duration of the Bank of Japan fs zero interest rate policy.

Suggested Citation

  • Jun Pan & Kenneth J. Singleton, 2006. "Interpreting Recent Changes in the Credit Spreads of Japanese Banks," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 24(S1), pages 129-141, December.
  • Handle: RePEc:ime:imemes:v:24:y:december:i:s1:p:129-41

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    References listed on IDEAS

    1. Naohiko Baba & Motoharu Nakashima & Yosuke Shigemi & Kazuo Ueda, 2006. "The Bank of Japan's Monetary Policy and Bank Risk Premiums in the Money Market," International Journal of Central Banking, International Journal of Central Banking, vol. 2(1), March.
    2. Yoichi Ueno & Naohiko Baba, 2006. "Default Intensity and Expected Recovery of Japanese Banks and "Government": New Evidence from the CDS Market," Bank of Japan Working Paper Series 06-E-4, Bank of Japan.
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    Cited by:

    1. Arakelyan, Armen & Serrano, Pedro, 2016. "Liquidity in Credit Default Swap Markets," Journal of Multinational Financial Management, Elsevier, vol. 37, pages 139-157.
    2. Groba, Jonatan & Lafuente, Juan A. & Serrano, Pedro, 2013. "The impact of distressed economies on the EU sovereign market," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2520-2532.
    3. Díaz, Antonio & Groba, Jonatan & Serrano, Pedro, 2013. "What drives corporate default risk premia? Evidence from the CDS market," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 529-563.

    More about this item


    Default risk premium; Credit default swap; Japanese banks; Zero interest rate policy; Event risk;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill


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