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Do CDS Spreads Predict Bank Volatility? Evidence from the Swedish Banking Sector

Sabelberg, Richard LU (2025) NEKN01 20251
Department of Economics
Abstract
This thesis investigates whether Credit Default Swap (CDS) spreads predict bank stock volatility in the Swedish banking sector, focusing on Nordea, Swedbank, Handelsbanken, and SEB from July 2, 2008, to April 4, 2025. Employing ARCH-M, GARCH, GJR-GARCH, and EGARCH volatility models within a Vector Autoregressive (VAR) framework, the thesis examines Granger causality across the Global Financial Crisis, the COVID-19 crisis, and the entire sample period 2008-2025. Results show that five-year CDS spreads significantly predict bank-stock volatility, particularly during the GFC, where asymmetric models capture the leverage effect, indicating market inefficiency under the semi-strong Efficient Market Hypothesis. Causality weakens during COVID-19... (More)
This thesis investigates whether Credit Default Swap (CDS) spreads predict bank stock volatility in the Swedish banking sector, focusing on Nordea, Swedbank, Handelsbanken, and SEB from July 2, 2008, to April 4, 2025. Employing ARCH-M, GARCH, GJR-GARCH, and EGARCH volatility models within a Vector Autoregressive (VAR) framework, the thesis examines Granger causality across the Global Financial Crisis, the COVID-19 crisis, and the entire sample period 2008-2025. Results show that five-year CDS spreads significantly predict bank-stock volatility, particularly during the GFC, where asymmetric models capture the leverage effect, indicating market inefficiency under the semi-strong Efficient Market Hypothesis. Causality weakens during COVID-19 due to the exogenous nature of the shock and policy interventions. At the same time, the whole sample period shows mixed results, reflecting the averaging of crisis and non-crisis dynamics. Bank-specific patterns highlight Nordea’s systemic role during the GFC and Handelsbanken’s influence in COVID-19. The findings of the thesis advocate for CDS spreads as a tool in regulatory stress-testing and investor risk management, particularly in Sweden’s concentrated banking sector. (Less)
Please use this url to cite or link to this publication:
author
Sabelberg, Richard LU
supervisor
organization
course
NEKN01 20251
year
type
H1 - Master's Degree (One Year)
subject
keywords
CDS, Credit, Financial Risk, Banking
language
English
id
9193875
date added to LUP
2025-09-12 10:00:28
date last changed
2025-09-12 10:00:28
@misc{9193875,
  abstract     = {{This thesis investigates whether Credit Default Swap (CDS) spreads predict bank stock volatility in the Swedish banking sector, focusing on Nordea, Swedbank, Handelsbanken, and SEB from July 2, 2008, to April 4, 2025. Employing ARCH-M, GARCH, GJR-GARCH, and EGARCH volatility models within a Vector Autoregressive (VAR) framework, the thesis examines Granger causality across the Global Financial Crisis, the COVID-19 crisis, and the entire sample period 2008-2025. Results show that five-year CDS spreads significantly predict bank-stock volatility, particularly during the GFC, where asymmetric models capture the leverage effect, indicating market inefficiency under the semi-strong Efficient Market Hypothesis. Causality weakens during COVID-19 due to the exogenous nature of the shock and policy interventions. At the same time, the whole sample period shows mixed results, reflecting the averaging of crisis and non-crisis dynamics. Bank-specific patterns highlight Nordea’s systemic role during the GFC and Handelsbanken’s influence in COVID-19. The findings of the thesis advocate for CDS spreads as a tool in regulatory stress-testing and investor risk management, particularly in Sweden’s concentrated banking sector.}},
  author       = {{Sabelberg, Richard}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Do CDS Spreads Predict Bank Volatility? Evidence from the Swedish Banking Sector}},
  year         = {{2025}},
}