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Credit Risk in a Pandemic

Author

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  • Byström, Hans

    (Department of Economics, Lund University)

Abstract

Using different measures of how the Covid-19 pandemic progresses we find that the level of credit risk among US blue chip companies increases in tandem with the Covid-19 virus spreading. The credit risk increases dramatically during the pandemic, but we find it to be short of the levels seen during the 2008–2009 financial crisis. Furthermore, we find weekly ups and downs in credit risk and virus impact to be significantly positively correlated throughout the pandemic. Finally, Basel II capital requirements increase drastically when the pandemic strikes but, again, not to the levels seen during the financial crisis.

Suggested Citation

  • Byström, Hans, 2021. "Credit Risk in a Pandemic," Working Papers 2021:1, Lund University, Department of Economics.
    • Handle: RePEc:hhs:lunewp:2021_001
    Note: Forthcoming in Journal of Fixed Income
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    References listed on IDEAS

    as
    1. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    2. Albulescu, Claudiu Tiberiu, 2021. "COVID-19 and the United States financial markets’ volatility," Finance Research Letters, Elsevier, vol. 38(C).
    3. Schoenmaker, Dirk & Reinders, Henk Jan & Van Dijk, Mathijs, 2020. "Is COVID-19 a threat to financial stability in Europe?," CEPR Discussion Papers 14922, C.E.P.R. Discussion Papers.
    4. Scott R. Baker & Nicholas Bloom & Steven J. Davis & Kyle J. Kost & Marco C. Sammon & Tasaneeya Viratyosin, 2020. "The Unprecedented Stock Market Impact of COVID-19," NBER Working Papers 26945, National Bureau of Economic Research, Inc.
    5. Alexeev, Vitali & Tapon, Francis, 2013. "Equity Portfolio Diversification: How Many Stocks are Enough? Evidence from Five Developed Markets," Working Papers 2013-16, University of Tasmania, Tasmanian School of Business and Economics, revised 20 Nov 2013.
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    Cited by:

    1. Alessandra Ortolano & Eugenia Nissi, 2022. "The Volatility of the “Green” Option-Adjusted Spread: Evidence before and during the Pandemic Period," Risks, MDPI, vol. 10(3), pages 1-13, February.

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    More about this item

    Keywords

    credit risk; Covid-19; equity market; debt market; CDS; Merton model; Basel II;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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