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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:

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This paper examines the recent period of relatively low credit spreads in Japan, with particular emphasis on the marketfs 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- defaulth 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 Japanfs zero interest rate policy.

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Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

Volume (Year): 24 (2006)
Issue (Month): S1 (December)
Pages: 129-141

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Handle: RePEc:ime:imemes:v:24:y:december:i:s1:p:129-41
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  1. Naohiko Baba & Motoharu Nakashima & Yousuke Shigemi & Kazuo Ueda, 2005. "The Bank of Japan's Monetary Policy and Bank Risk Premiums in the Money Market," CIRJE F-Series CIRJE-F-374, CIRJE, Faculty of Economics, University of Tokyo.
  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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