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The relation between sovereign credit default swap premium and banking sector risk in Poland

Author

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  • Łukasz Gątarek
  • Marcin Wojtowicz

Abstract

We investigate causality between returns on sovereign CDSs and bank equities for Poland between 2004 and 2014 to provide evidence on contagion between sovereign and banking sector risk pricing. We find some evidence of contagion from Polish sovereign CDS returns to bank equity returns during the crisis period. We benchmark the results for Poland against a sample ofWestern European countries. We document strong negative correlation between sovereign CDS and bank equity returns for individual countries as well as strong commonality of both sovereign and banking sector risks across different countries. We do not however find a clear pattern of contagion between these two markets across European countries. To further investigate drivers of CDS and bank equity returns, we conduct principal component analysis and we find that first three principal components explain as much as 97% of variation with the third principal component mostly associated with Polandspecific risk.

Suggested Citation

  • Łukasz Gątarek & Marcin Wojtowicz, 2015. "The relation between sovereign credit default swap premium and banking sector risk in Poland," NBP Working Papers 222, Narodowy Bank Polski.
    • Handle: RePEc:nbp:nbpmis:222
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    References listed on IDEAS

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    1. Longstaff, Francis A., 2010. "The subprime credit crisis and contagion in financial markets," Journal of Financial Economics, Elsevier, vol. 97(3), pages 436-450, September.
    2. Francis A. Longstaff & Jun Pan & Lasse H. Pedersen & Kenneth J. Singleton, 2011. "How Sovereign Is Sovereign Credit Risk?," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 75-103, April.
    3. 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.
    4. Marcin Wojtowicz, 2014. "The Determinants of CDS Bid-ask Spreads," Tinbergen Institute Discussion Papers 14-138/IV/ DSF82, Tinbergen Institute.
    5. Kathryn Chen & Michael J. Fleming & John Jackson & Ada Li & Asani Sarkar, 2011. "An analysis of CDS transactions: implications for public reporting," Staff Reports 517, Federal Reserve Bank of New York.
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    Cited by:

    1. Kocsis, Zalan & Monostori, Zoltan, 2016. "The role of country-specific fundamentals in sovereign CDS spreads: Eastern European experiences," Emerging Markets Review, Elsevier, vol. 27(C), pages 140-168.

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    Keywords

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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