Determinants of Credit Default Swap Spreads: A Four-Market Panel Data Analysis

Li, Matthew C.; Fung, K. C.

doi:10.12735/jfe.v5n1p09

Cited by 3 publications

(2 citation statements)

References 41 publications

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“…More recently, Li and Fu (2017) have found that market value indicators (Tobin’s q, stock market returns and the interest rate) appear to be more important than book value indicators (i.e., ROA, ROE) as CDS spread determinants. Their observations deal with both two European countries (i.e., Germany and France) and two Asian ones (namely South Korea and Hong Kong).…”

Section: Review Of Literaturementioning

confidence: 99%

Eurozone Crisis and Banks’ Creditworthiness: What is New for Credit Default Swap Spread Determinants?

Ortolano

Angelini

2020

Global Business Review

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The article analyses banks’ credit default swap (CDS) spread determinants, in light of the Eurozone debt crisis. The attention to this aspect is due to the very linkage between banking and sovereign sectors particularly evident during the aforementioned crisis. The study is conducted on a sample of Eurozone banks over the period 2009–2014 through a feasible generalized least squares (FGLS) linear panel data regression. The variables adopted are both balance sheet ratios and macroeconomic factors. The main results confirm the attention pointed at the influence of public conditions to the banking sector, as proved by the significance of variables like the 10-year bond yields or the long-term sovereign rating. It is also interesting to observe the output dealing with public debt, which may suggest opportunities not only of investment but also of speculation for banks on the debt itself. Balance sheet ratios, instead, are not significant. Our study is an additional contribution to the strand of literature that analyses the strong interconnections between the riskiness of banks and the public sector and it is a suggestion to proceed the research with a deeper analysis on systemic risk and its impact on banking CDS spread.

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Section: Review Of Literaturementioning

confidence: 99%

Eurozone Crisis and Banks’ Creditworthiness: What is New for Credit Default Swap Spread Determinants?

Ortolano

Angelini

2020

Global Business Review

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“…They find that the derivative is more sensitive to market risk factors, while the impact of capital adequacy, earnings and liquidity indicators is weaker. Analogously Li and Fu (2017), find that market value indicators (namely, Tobin's Q, stock market returns and interest rate) appear to be more important than book value indicators, as CDS determinants. Similar findings are shown by Samaniego-Medina et al (2016), who show great explanatory power for market variables in terms of market equity return and volatility, whereas, as concerns accounting variables, they find significance for the non-performing loan ratio, the capitalisation ratio and liquidity proxies.…”

Section: Literature Reviewmentioning

confidence: 75%

Bad or good neighbours: a spatial financial contagion study

Foglia

Ortolano

Febo

et al. 2020

SEF

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Purpose The purpose of this paper is to study the evolution of financial contagion between Eurozone banks, observing the credit default swaps (CDSs) market during the period 2009–2017. Design/methodology/approach The authors use a dynamic spatial Durbin model that enables to explore the direct and indirect effects over the short and long run and the transmission channels of the contagion. Findings The results show how contagion emerges through physical and financial market links between banks. This finding implies that a bank can fail because people expect other related financial institutions to fail as well (self-fulfilling crisis). The study provides statistically significant evidence of the presence of credit risk spillovers in CDS markets. The findings show that equity market dynamics of “neighbouring” banks are important factors in risk transmission. Originality/value The research provides a new contribution to the analysis of EZ banking risk contagion, studying CDS spread determinants both under a temporal and spatial dimension. Considering the cross-dependence of credit spreads, the study allowed to verify the non-linearity between the probability of default of a debtor and the observed credit spreads (credit spread puzzle). The authors provide information on the transmission mechanism of contagion and, on the effects among the largest banks. In fact, through the study of short- and long-term impacts, direct and indirect, the paper classify banks of systemic importance according to their effect on the financial system.

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