IDEAS home Printed from https://ideas.repec.org/p/frd/wpaper/dp2010-12.html
   My bibliography  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

Listed:
  • Caitlin Ann Greatrex

    (Iona College, Department of Economics)

  • Erick W. Rengifo

    (Fordham University, Department of Economics)

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.

Suggested Citation

  • Caitlin Ann Greatrex & Erick W. Rengifo, 2010. "Government Intervention and the CDS Market: A Look at the Market's Response to Policy Announcements During the 2007-2009 Financial Crisis," Fordham Economics Discussion Paper Series dp2010-12, Fordham University, Department of Economics.
    • Handle: RePEc:frd:wpaper:dp2010-12
    as

    Download full text from publisher

    File URL: https://archive.fordham.edu/ECONOMICS_RESEARCH/PAPERS/dp2010_12_greatrex_rengifo.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    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, June.
    2. Fabio Panetta & Thomas Faeh & Giuseppe Grande & Corrinne Ho & Michael R King & Aviram Levy & Federico M Signoretti & Marco Taboga & Andrea Zaghini, 2009. "An assessment of financial sector rescue programmes," BIS Papers, Bank for International Settlements, number 48.
    3. Nowak, Sylwia & Andritzky, Jochen & Jobst, Andreas & Tamirisa, Natalia, 2011. "Macroeconomic fundamentals, price discovery, and volatility dynamics in emerging bond markets," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2584-2597, October.
    4. Acharya, Viral V. & Johnson, Timothy C., 2007. "Insider trading in credit derivatives," Journal of Financial Economics, Elsevier, vol. 84(1), pages 110-141, April.
    5. 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.
    6. Ivashina, Victoria & Scharfstein, David, 2010. "Bank lending during the financial crisis of 2008," Journal of Financial Economics, Elsevier, vol. 97(3), pages 319-338, September.
    7. International Monetary Fund, 2009. "Macroeconomic Fundamentals, Price Discovery and Volatility Dynamics in Emerging Markets," IMF Working Papers 2009/147, International Monetary Fund.
    8. 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.
    9. 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 2009/204, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations

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


    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Aït-Sahalia, Yacine & Andritzky, Jochen & Jobst, Andreas & Nowak, Sylwia & Tamirisa, Natalia, 2012. "Market response to policy initiatives during the global financial crisis," Journal of International Economics, Elsevier, vol. 87(1), pages 162-177.
    2. 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 2009/204, International Monetary Fund.
    3. Grammatikos, Theoharry & Lehnert, Thorsten & Otsubo, Yoichi, 2015. "Market perceptions of US and European policy actions around the subprime crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 37(C), pages 99-113.
    4. Gonzalo, Jesús & Taamouti, Abderrahim, 2011. "The reaction of stock market returns to anticipated unemployment," UC3M Working papers. Economics we1145, Universidad Carlos III de Madrid. Departamento de Economía.
    5. Song, Wei-Ling & Uzmanoglu, Cihan, 2016. "TARP announcement, bank health, and borrowers’ credit risk," Journal of Financial Stability, Elsevier, vol. 22(C), pages 22-32.
    6. Duygan-Bump, Burcu & Levkov, Alexey & Montoriol-Garriga, Judit, 2015. "Financing constraints and unemployment: Evidence from the Great Recession," Journal of Monetary Economics, Elsevier, vol. 75(C), pages 89-105.
    7. Matthew Rognlie & Andrei Shleifer & Alp Simsek, 2018. "Investment Hangover and the Great Recession," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(2), pages 113-153, April.
    8. Custódio, Cláudia & Ferreira, Miguel A. & Laureano, Luís, 2013. "Why are US firms using more short-term debt?," Journal of Financial Economics, Elsevier, vol. 108(1), pages 182-212.
    9. Ippolito, Filippo & Peydró, José-Luis & Polo, Andrea & Sette, Enrico, 2016. "Double bank runs and liquidity risk management," Journal of Financial Economics, Elsevier, vol. 122(1), pages 135-154.
    10. Klomp, Jeroen, 2013. "Government interventions and default risk: Does one size fit all?," Journal of Financial Stability, Elsevier, vol. 9(4), pages 641-653.
    11. Viral Acharya & Itamar Drechsler & Philipp Schnabl, 2014. "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," Journal of Finance, American Finance Association, vol. 69(6), pages 2689-2739, December.
    12. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2014. "Asymmetric adjustment toward optimal capital structure: Evidence from a crisis," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 226-242.
    13. Brei, Michael & Gambacorta, Leonardo & von Peter, Goetz, 2013. "Rescue packages and bank lending," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 490-505.
    14. Gianluca Benigno & Andrew Foerster & Christopher Otrok & Alessandro Rebucci, 2025. "Estimating macroeconomic models of financial crises: An endogenous regime‐switching approach," Quantitative Economics, Econometric Society, vol. 16(1), pages 1-47, January.
    15. Heitor Almeida & Murillo Campello & Igor Cunha & Michael S. Weisbach, 2014. "Corporate Liquidity Management: A Conceptual Framework and Survey," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 135-162, December.
    16. Liebmann, Michael & Orlov, Alexei G. & Neumann, Dirk, 2016. "The tone of financial news and the perceptions of stock and CDS traders," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 159-175.
    17. Williamson, Rohan & Yang, Jie, 2021. "Tapping into financial synergies: Alleviating financial constraints through acquisitions," Journal of Corporate Finance, Elsevier, vol. 68(C).
    18. Annalisa Ferrando & Alexander Popov & Gregory F. Udell, 2019. "Do SMEs Benefit from Unconventional Monetary Policy and How? Microevidence from the Eurozone," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(4), pages 895-928, June.
    19. Sean Cleary & Ashrafee Hossain, 2020. "POSTCRISIS M&As AND THE IMPACT OF FINANCIAL CONSTRAINTS," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 43(2), pages 407-454, May.
    20. Quoc Trung Tran, 2020. "Corporate cash holdings and financial crisis: new evidence from an emerging market," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 10(2), pages 271-285, June.

    More about this item

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. 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.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Fordham Economics (email available below). General contact details of provider: https://edirc.repec.org/data/edforus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.