IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Government Intervention and the CDS Market: A Look at the Market's Response to Policy Announcements During the 2007-2009 Financial Crisis

Author Info

Listed author(s):
  • Caitlin Ann Greatrex

    (Iona College, Department of Economics)

  • Erick W. Rengifo

    (Fordham University, Department of Economics)

Registered author(s):

    Abstract

    This paper adds to the literature on the financial markets' reaction to government interventions during the 2007-2009 financial crisis by analyzing the response of US firms' credit default swap spreads to key government actions. We find that the government measures taken to stabilize both the financial sector and the overall economy were generally well-received by CDS market participants, reducing perceived credit risk across a broad cross-section of firms. Financial firms responded most favorably to financial sector policies and interest rate cuts, with announcement date abnormal CDS spread changes of -5 and -2 percent, respectively. Non-financial firms responded most favorably to conventional fiscal and monetary policy tools with spread reductions of approximately one percent upon announcement of these measures. In a cross-sectional regression analysis, we find that size, recent performance, profitability, and stock returns are key factors in explaining the financial sectors response to government actions.

    Download Info

    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.

    File URL: http://legacy.fordham.edu/images/academics/graduate_schools/gsas/economics/dp2010_12_greatrex_rengifo.pdf
    Download Restriction: no

    Paper provided by Fordham University, Department of Economics in its series Fordham Economics Discussion Paper Series with number dp2010-12.

    as
    in new window

    Length:
    Date of creation: 2010
    Handle: RePEc:frd:wpaper:dp2010-12
    Contact details of provider: Web page: http://www.fordham.edu/economics/
    Email:


    More information through EDIRC

    Keywords:

    Find related papers by JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    This paper has been announced in the following NEP Reports:

    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.:

    as
    in new window


    1. Ben S. Bernanke & Kenneth N. Kuttner, 2005. "What Explains the Stock Market's Reaction to Federal Reserve Policy?," Journal of Finance, American Finance Association, vol. 60(3), pages 1221-1257, 06.
    2. Campello, Murillo & Graham, John R. & Harvey, Campbell R., 2010. "The real effects of financial constraints: Evidence from a financial crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 470-487, September.
    3. Michael R King, 2009. "Time to buy or just buying time? The market reaction to bank rescue packages," BIS Working Papers 288, Bank for International Settlements.
    4. Bank for International Settlements, 2009. "An assessment of financial sector rescue programmes," BIS Papers, Bank for International Settlements, number 48, March.
    5. International Monetary Fund, 2009. "Macroeconomic Fundamentals, Price Discovery and Volatility Dynamics in Emerging Markets," IMF Working Papers 09/147, International Monetary Fund.
    6. International Monetary Fund, 2009. "How to Stop a Herd of Running Bears? Market Response to Policy Initiatives during the Global Financial Crisis," IMF Working Papers 09/204, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    as
    in new window


    Cited by:

    1. Klomp, Jeroen, 2013. "Government interventions and default risk: Does one size fit all?," Journal of Financial Stability, Elsevier, vol. 9(4), pages 641-653.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Access and download statistics

    When requesting a correction, please mention this item's handle: RePEc:frd:wpaper:dp2010-12. 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: (Fordham Economics)

    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.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.