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Credit Derivatives and Loan Pricing

Author

Listed:
  • Norden, L.
  • Wagner, W.B.

    (Tilburg University, TILEC)

Abstract

This paper examines the relation between the new markets for credit default swaps (CDS) and banks' pricing of syndicated loans to US corporates. We find that changes in CDS spreads have a significantly positive coefficient and explain about 25% of subsequent monthly changes in aggregate loan spreads during 2000-2005. Moreover, when compared to traditional explanatory factors, they turn out to be the dominant determinant of loan spreads. In particular, they explain loan rates much better than same rated bonds. This suggests that CDS prices contain, beyond general credit risk, to a substantial extent information relevant for bank lending. We also find that, over time, new information from CDS markets is faster incorporated into loans, but information from other markets is not. Overall, our results indicate that the markets for CDS have gained an important role for banks.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Norden, L. & Wagner, W.B., 2007. "Credit Derivatives and Loan Pricing," Discussion Paper 2007-015, Tilburg University, Tilburg Law and Economic Center.
  • Handle: RePEc:tiu:tiutil:eb6693d1-7ce6-485f-80cb-5b87721ff517
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Syndicated Lending; Loan Rates; Credit Derivatives; Credit Markets; Credit Spreads;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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