Skip to main content
SpringerLink
Log in

The Determinants of CDS Spreads: The Case of Banks

  • Chapter
  • First Online:
Book cover Financial Markets, SME Financing and Emerging Economies

  • 847 Accesses

Abstract

Using a regression analysis, we study the determinants of credit default swaps (CDS) spreads of 86 international banks from 2009 to 2012. We are interested in empirically testing the explanatory power of credit risk, bank-specific, market and country-level factors . We find the following main results. The explanatory power of the model increases when bank-specific and market/country variables are considered. Capitalisation and size are the most relevant factors in determining the banks’ CDS spreads. When the rating decreases, the CDS premium increases, and this increase is significant when switching from investment to non-investment grade banks. Also, the market volatility and slope of the yield curve affect the CDS spreads.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 99.00
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 129.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD 129.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

References

  • Aktung, E. G., Vasconcellos, and Y. Bae. 2009. The dynamics of sovereign credit default swap and bond markets: Empirical evidence from the 2001–2007 period. Applied Economics Letters 19: 251–259.

    Google Scholar 

  • Altman, E.I., B. Brady, A. Resti, and A. Sironi. 2005. The link between default and recovery rates: Theory, empirical evidence and implications. Journal of Business 78: 2203–2227.

    Article  Google Scholar 

  • Amato, J.D., and E.M. Remolona. 2003. The credit spread puzzle. BIS Quarterly Review, December, 51–63.

    Google Scholar 

  • Ammer, J., and F. Cai. 2011. Sovereign CDS and bond pricing dynamics in emerging markets: Does the cheapest-to-deliver option matter? Journal of International Financial Markets, Institutions and Money 21 (3): 369–387.

    Article  Google Scholar 

  • Annaert, J., M. De Ceuster, P. Van Roy, and C. Vespro. 2013. What determines Euro area bank CDS spreads? Journal of International Money and Finance 32: 444–461.

    Article  Google Scholar 

  • Arellano, M., and S. Bond. 1991. Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 277–297.

    Google Scholar 

  • Augustin, P., M.G. Subrahmanyam, D.Y. Tang, and S.Q. Wang. 2014. Credit default swaps: A survey. Foundations and Trends in Finance 9 (1–2): 1–196.

    Article  Google Scholar 

  • Becker, B., and V. Ivashina. 2015. Reaching for yield in the bond market. Journal of Finance 5: 1863–1901.

    Article  Google Scholar 

  • Berger, A.N., L.F. Klapper, and R. -Ariss Turk. Bank competition and financial stability. Journal of Financial Services Research 35 (2): 99–118.

    Google Scholar 

  • BIS. 2011. Basilea 3—Schema di regolamentazione internazionale per il rafforzamento delle banche e dei sistemi bancari. Basel Committee.

    Google Scholar 

  • Blanco, R., S. Brennan, and I. Marsh. 2005. An empirical analysis of the dynamic relationship between investment-grade bonds and credit default swaps. Journal of Finance 60: 2255–2281.

    Article  Google Scholar 

  • Boss, M., and M. Scheicher. 2005. The determinants of credit spread changes in the Euro area. Bank for International Settlements.

    Google Scholar 

  • Burchi, A., and D. Drago. 2012. Are credit ratings and CDS spreads aligned? The implications for regulation and loan pricing. Bancaria 10: 42–65.

    Google Scholar 

  • Carboni, A. 2011. The sovereign credit default swap market: Price discovery, volumes and links with banks’ risk premia. Bank of Italy Temi di Discussione Working paper 821.

    Google Scholar 

  • Chiaramonte, L., and B. Casu. 2013. The determinants of bank CDS spreads: Evidence from the financial crisis. European Journal of Finance 19: 861–887.

    Article  Google Scholar 

  • Collin-Dufresne, P., R.S. Goldstein, and J.S. Martin. 2001. The determinants of credit spread changes. Journal of Finance 56 (6): 2177–2207.

    Article  Google Scholar 

  • Coudert, V., and M. Gex. 2010. Credit default swap and bond markets: Which leads the other? Financial Stability Review, Banque de France 14: 161–167.

    Google Scholar 

  • De Nicolò G. 2000. Size, charter value and risk in banking: an international perspective. International Finance Discussion Paper 689, Board of Governors of the Federal Reserve System, Washington, DC.

    Google Scholar 

  • Demirguc-Kunt, A., L. Laeven, and R. Levine. 2004. Regulations, market structure, institutions, and the cost of financial intermediation. Journal Money Credit Bank 36: 593–622.

    Article  Google Scholar 

  • Di Cesare A. 2006. Do market-based indicators anticipate rating agencies? Evidence for international banks. Bank of Italy Temi di Discussione Working Paper 593: 1–42.

    Google Scholar 

  • Di Cesare A., and G. Guazzarotti. 2010. An analysis of the determinants of credit default swap spread changes before and during the subprime financial turmoil. Bank of Italy Temi di Discussione Working Paper 749.

    Google Scholar 

  • Drago, D., and R. Gallo. 2016. The impact and the spillover effect of a sovereign rating announcement on the Euro area CDS market. Journal of International Money and Finance 67: 264–286.

    Article  Google Scholar 

  • Driessen, J. 2005. Is default event risk priced in corporate bonds? Review of Financial Studies 18 (1): 165–195.

    Article  Google Scholar 

  • Düllmann, K., and A. Sosinska. 2007. Credit default swap prices as risk indicators of listed German banks. Financial Markets and Portfolio Management 21: 269–292.

    Article  Google Scholar 

  • EBA. 2014. Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP), 19 December: 1–218.

    Google Scholar 

  • EBA. 2015. Guidelines on the minimum list of qualitative and quantitative recovery plan indicators. Final Report 6 May: 1–41.

    Google Scholar 

  • ECB. 2010. Beyond ROE–How to measure bank performance. European Central Bank.

    Google Scholar 

  • Elton, E.J., M.J. Gruber, D. Agrawal, and C. Mann. 2001. Explaining the rate spread on corporate bonds. Journal of Finance 56 (1): 247–277.

    Article  Google Scholar 

  • Ericsson, J., K. Jacobs, and R. Oviedo. 2009. The determinants of credit default swap premia. Journal of Financial and Quantitative Analysis 44 (1): 109–132.

    Article  Google Scholar 

  • European Commission. 2014. Quarterly Report on the Euro Area 13 (4): 1–38.

    Google Scholar 

  • FitchRatings. 2007. Fitch CDS implied ratings Model, 13 June.

    Google Scholar 

  • Fontana, A., and M. Scheicher. 2010. An analysis of Euro area sovereign CDS and their relation with government bonds. European Central Bank Working papers, 1271, December: 1–47.

    Google Scholar 

  • Galil, K., O.M. Shapir, D. Amiram, and U. Ben-Zion. 2014. The determinants of CDS spreads. Journal of Banking & Finance 41: 271–282.

    Article  Google Scholar 

  • Hasan, I., L. Liu, and G. Zhang. 2015. The determinants of global bank credit-default-swap spreads. Journal of Financial Services Research: 1–45.

    Google Scholar 

  • Heinz, F.F., and Y. Sun. 2014. Sovereign CDS Spreads in Europe—The role of global risk aversion, economic fundamentals, liquidity, and spillovers. IMF Working paper, WP/14/17.

    Google Scholar 

  • Hughes, J.P., L.J. Mester, and C. Moon. 2001. Are scale economies in banking elusive or illusive? Evidence obtained by incorporating capital structure and risk-taking into models of bank production checking accounts and bank monitoring, Journal of Banking.

    Google Scholar 

  • Hull, J., M. Predescu, and A. White. 2004. The Relationship between credit default swap spreads, bond yields, and credit rating announcements. Journal of Banking & Finance 28 (11): 2789–2811.

    Article  Google Scholar 

  • IMF. 2013. A new look at the role of sovereign credit default swap. Global Financial Stability Report, April: Chapter 2, 57–92.

    Google Scholar 

  • Kanagaretnam, K., G. Zhang, and S.B. Zhang. 2016. CDS pricing and accounting disclosures: Evidence from US bank holding corporations around the recent financial crisis. Journal of Financial Stability 22: 33–44.

    Article  Google Scholar 

  • La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny. 1998. Law and finance. Journal of Political Economy 106 (6): 1113–1155.

    Article  Google Scholar 

  • Liu, L., G. Zhang, and Y. Fang. 2016. Bank credit default swaps and deposit insurance around the world. Journal of International Money and Finance.

    Google Scholar 

  • Meng, L., and O.A. Gwilym. 2008. The determinants of CDS bid-ask spreads. Journal of Derivatives: 70–80.

    Google Scholar 

  • Merton, R.C. 1974. On the pricing of corporate debt: The risk structure of interest rates. Journal of Finance 29 (2): 449–470.

    Google Scholar 

  • Minton, B.A., R. Stulz, and R. Williamson. 2009. How much do banks use credit derivatives to hedge loans? Journal of Financial Service Research 35 (1): 1–31.

    Article  Google Scholar 

  • Norden, L., and M. Weber. 2004. Informational efficiency of credit default swap and stock markets: The impact of credit rating announcements. Journal of Banking & Finance 28: 2813–2843.

    Article  Google Scholar 

  • O’Kane, D., and S. Sen. 2005. Credit spreads explained. Journal of Credit Risk 1: 61–78.

    Article  Google Scholar 

  • Perraudin, W., and A.P. Taylor. 2004. On the consistency of ratings and bond market yields. Journal of Banking & Finance 28: 2769–2788.

    Article  Google Scholar 

  • Pires, P., J.P. Pereira, and L.F. Martins. 2015. The empirical determinants of credit default swap spreads: A quantile regression approach. European Financial Management 21 (3): 556–589.

    Article  Google Scholar 

  • Raunig, B., and M. Scheicher. 2009. Are banks different? Evidence from the CDS Market. Oesterreichische National Bank Working paper 152: 1–39.

    Google Scholar 

  • Stever, R. 2007. Bank size, credit and the sources of bank market risk. BIS Working paper 238: 1–31.

    Google Scholar 

  • Vallascas, F., and J. Hagendorff. 2013. The risk sensitivity of capital requirements: Evidence from an international sample of large banks. Review of Finance 17 (6): 1947–1988.

    Article  Google Scholar 

  • Zhang, B.Y., H. Zhou, and H. Zhu. 2009. Explaining credit default swap spreads with equity volatility and jump risks of individual firms. Review of Financial Studies 22 (12): 5099–5131.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. University of Calabria, Rende, Italy

    Maria Mazzuca, Caterina Di Tommaso & Fabio Piluso

Authors
  1. Maria Mazzuca
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Caterina Di Tommaso
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Fabio Piluso
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Maria Mazzuca .

Editor information

Editors and Affiliations

  1. Department of Business Administration, University of Verona, Verona, Italy

    Giusy Chesini

  2. Department of Business Administration, University of Verona, Verona, Italy

    Elisa Giaretta

  3. Department of Economics and Statistics, University of Udine, Udine, Italy

    Andrea Paltrinieri

Rights and permissions

Reprints and permissions

Copyright information

© 2017 The Author(s)

About this chapter

Cite this chapter

Mazzuca, M., Di Tommaso, C., Piluso, F. (2017). The Determinants of CDS Spreads: The Case of Banks. In: Chesini, G., Giaretta, E., Paltrinieri, A. (eds) Financial Markets, SME Financing and Emerging Economies. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-54891-3_7

Download citation

  • DOI: https://doi.org/10.1007/978-3-319-54891-3_7

  • Published:

  • Publisher Name: Palgrave Macmillan, Cham

  • Print ISBN: 978-3-319-54890-6

  • Online ISBN: 978-3-319-54891-3

  • eBook Packages: Economics and FinanceEconomics and Finance (R0)

Publish with us

Policies and ethics

Search

Navigation