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Default Intensity and Expected Recovery of Japanese Banks and "Government": New Evidence from the CDS Market

Author

Listed:
  • Yoichi Ueno

    (Bank of Japan)

  • Naohiko Baba

    (Bank of Japan)

Abstract

Using term structure data of Credit Default Swap (CDS) spreads for the four Japanese mega-banks and the government, we jointly estimate the default intensity and expected recovery (loss) given a default. In doing so, we attempt to further identify the difference in the expected recovery ratios between senior and subordinated CDS contracts. Estimation results are summarized as follows. (i) The default intensities for the banks and the government substantially rose in times of a banking crisis since the late 1990s. (ii) The expected recovery ratios for subordinated CDS contracts are significantly smaller than those for senior CDS contracts, ranging from 46 to 85 percent of those for senior CDSs, depending on the banks. (iii) Each bank's default intensity is significantly cointegrated with, and reacts to, the Japanese government's default intensity. This result implies that a systemic risk factor among Japanese major banks is closely related to the default intensity of the Japanese government.

Suggested Citation

  • 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.
    • Handle: RePEc:boj:bojwps:06-e-4
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Guarin, Alexander & Liu, Xiaoquan & Ng, Wing Lon, 2011. "Enhancing credit default swap valuation with meshfree methods," European Journal of Operational Research, Elsevier, vol. 214(3), pages 805-813, November.
    3. Harada, Kimie & Ito, Takatoshi & Takahashi, Shuhei, 2013. "Is the Distance to Default a good measure in predicting bank failures? A case study of Japanese major banks," Japan and the World Economy, Elsevier, vol. 27(C), pages 70-82.
    4. Harada, Kimie & Ito, Takatoshi, 2011. "Did mergers help Japanese mega-banks avoid failure? Analysis of the distance to default of banks," Journal of the Japanese and International Economies, Elsevier, vol. 25(1), pages 1-22, March.
    5. Kimie Harada & Takatoshi Ito & Shuhei Takahashi, 2010. "Is the Distance to Default a Good Measure in Predicting Bank Failures? Case Studies," NBER Working Papers 16182, National Bureau of Economic Research, Inc.
    6. Mili, Mehdi, 2019. "The impact of tradeoff between risk and return on mean reversion in sovereign CDS markets," Research in International Business and Finance, Elsevier, vol. 48(C), pages 187-200.

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    More about this item

    Keywords

    Credit Default Swap; Japanese Banks; Sovereign CDS; Subordinated CDS; Loss Given Default;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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