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Analysing Credit Default Swap Spreads of European Banks

Latakaite, Jovita LU and Neagu, Mihaela Dor LU (2014) BUSN88 20141
Department of Business Administration
Abstract
This paper investigates the determinants of the credit default swaps changes of 34 European banks between January 2004 and December 2013. The sample period is further divided into four sub-periods covering both calm and turbulent times (pre-crisis, acute phase and less acute phase of the financial crisis, and the most recent European sovereign debt crisis). We show that CDS spread changes are not entirely driven by credit risk. Our main finding is that liquidity, and market and sector specific factors are embedded in the CDS spreads. Moreover, the influence of these determinants appears to be time-varying. We prove that the credit risk specific to the banking sector as well as the CDS liquidity manifest an influence on the changes in the... (More)
This paper investigates the determinants of the credit default swaps changes of 34 European banks between January 2004 and December 2013. The sample period is further divided into four sub-periods covering both calm and turbulent times (pre-crisis, acute phase and less acute phase of the financial crisis, and the most recent European sovereign debt crisis). We show that CDS spread changes are not entirely driven by credit risk. Our main finding is that liquidity, and market and sector specific factors are embedded in the CDS spreads. Moreover, the influence of these determinants appears to be time-varying. We prove that the credit risk specific to the banking sector as well as the CDS liquidity manifest an influence on the changes in the CDS spread in all the sub-samples. Nonetheless, the market volatility changes do not seem to play any role, whereas equity liquidity has explanatory power only prior to the financial crisis. Moreover, we include an alternative channel for explaining CDS spread changes by means of which we control for time-specificity instead of including the market and sector specific variables. This analysis reveals that changes in accounting leverage do not explain CDS spreads fluctuations. (Less)
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author
Latakaite, Jovita LU and Neagu, Mihaela Dor LU
supervisor
organization
course
BUSN88 20141
year
type
H1 - Master's Degree (One Year)
subject
keywords
Credit Default Swaps, Credit Risk, European Banks, Structural Models of Credit Risk, Credit Ratings, Liquidity, Market Factors
language
English
id
4538826
date added to LUP
2014-08-20 10:30:44
date last changed
2014-08-20 10:30:44
@misc{4538826,
  abstract     = {This paper investigates the determinants of the credit default swaps changes of 34 European banks between January 2004 and December 2013. The sample period is further divided into four sub-periods covering both calm and turbulent times (pre-crisis, acute phase and less acute phase of the financial crisis, and the most recent European sovereign debt crisis). We show that CDS spread changes are not entirely driven by credit risk. Our main finding is that liquidity, and market and sector specific factors are embedded in the CDS spreads. Moreover, the influence of these determinants appears to be time-varying. We prove that the credit risk specific to the banking sector as well as the CDS liquidity manifest an influence on the changes in the CDS spread in all the sub-samples. Nonetheless, the market volatility changes do not seem to play any role, whereas equity liquidity has explanatory power only prior to the financial crisis. Moreover, we include an alternative channel for explaining CDS spread changes by means of which we control for time-specificity instead of including the market and sector specific variables. This analysis reveals that changes in accounting leverage do not explain CDS spreads fluctuations.},
  author       = {Latakaite, Jovita and Neagu, Mihaela Dor},
  keyword      = {Credit Default Swaps,Credit Risk,European Banks,Structural Models of Credit Risk,Credit Ratings,Liquidity,Market Factors},
  language     = {eng},
  note         = {Student Paper},
  title        = {Analysing Credit Default Swap Spreads of European Banks},
  year         = {2014},
}