Browsing by Subject "CDS"

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  • Haajanen, Jyrki; Pylkkönen, Pertti (2010)
    Bank of Finland. Financial market report 1
    CDS markets related to governments exposures have recently faced heavy criticism. Criticism of derivatives markets is understandable following the financial crisis, but demands for restrictions, or prohibitions, on trading in certain products require thorough analysis.
  • Haajanen, Jyrki; Pylkkönen, Pertti (2010)
    Suomen Pankki. Rahoitusmarkkinaraportti 1
    Valtion riskeihin kohdistuvat CDS-markkinat ovat joutuneet viime aikoina ankaran arvostelun kohteeksi. Kriittinen suhtautuminen johdannaismarkkinoihin on rahoituskriisin jälkeen ymmärrettävää, mutta vaatimukset joidenkin yksittäisten tuotteiden kaupankäynnin rajoittamisesta tai jopa kieltämisestä edellyttävät huolellista analysointia.
  • Hasan, Iftekhar; Wu, Deming (2016)
    Bank of Finland Research Discussion Papers 9/2016
    Do banks use credit default swap hedging to substitute for loan sales? By tracking banks’ lending exposures and CDS positions on individual firms, we find that banks use CDS hedging to complement rather than to substitute for loan sales. Consequently, bank loan sales are higher for firms that are actively traded in the CDS market. In addition, we find evidence that suggests that banks sell CDS protection as credit enhancements to facilitate loan sales. This study employs identification strategies similar to the “twin study” design to separate the effects of borrower-side and lender-side factors, and to minimize the omitted-variables bias.
  • Tölö, Eero; Jokivuolle, Esa; Virén, Matti (2017)
    Journal of Financial Intermediation July
    We construct a measure of a bank's relative creditworthiness from the Eurosystem's proprietary inter-bank loan data: average overnight borrowing rate relative to an overnight rate index (AOR). We then investigate the dynamic relationship between AOR and the credit default swap price relative to the corresponding market index of 60 banks during 2008–2013. Price discovery mainly takes place in the CDS market, but AOR also contributes to it. The lagged daily changes of AOR help predict CDS. This indicates that AOR includes private information, which the CDS market does not immediately incorporate. We further show that the private information advantage is concentrated on days of market stress and on banks, which mainly borrow from relationship lender banks. Such borrower banks are typically smaller, have weaker ratings, and are likely to reside in crisis countries. Competent authorities can use AOR as a complementary indicator of banks’ concurrent health.
  • Tölö, Eero; Jokivuolle, Esa; Virén, Matti (2014)
    Bank of Finland Research Discussion Papers 9/2014
    We investigate the relationship between the daily average interbank overnight borrowing rate (AOR) and the credit default swap price (CDS) of 60 banks using the Eurosystem's proprietary data from mid-2008 to mid-2013. We find that the AOR which is observable only by the competent Eurosystem authorities leads the CDS at least by one day. The lead was concentrated on days of market stress for banks which mainly borrow from "relationship" lender banks. Such borrower banks are typically smaller, have weak ratings, and likely reside in crisis countries.
  • Hasan, Iftekhar; Wu, Deming (2016)
    Bank of Finland Research Discussion Papers 10/2016
    ​We test five hypotheses on whether banks use CDS to hedge corporate loans, provide credit enhancements, obtain regulatory capital relief, and exploit banking relationship and private information. Linking large banks’ CDS positions and syndicated lending on individual firms, we observe strong evidence for the credit enhancement and regulatory capital relief hypotheses, but mixed evidence for the hedging, banking relationship, and private information hypotheses. Banks buy and sell more CDS on their borrowers, but their net CDS positions and lending status are largely unrelated. We find no evidence of bank using CDS to exploit private information.
  • Hasan, Iftekhar; Liu, Liuling; Zhang, Gaiyan (2014)
    Bank of Finland Research Discussion Papers 33/2014
    Published in Journal of Financial Services Research, December 2016, Volume 50, Issue 3: 275–309
    Using a sample of 161 global banks in 23 countries, we examine the applicability of structural models and bank fundamentals to price global bank credit risk. First, we find that variables predicted by structural models (leverage, volatility, and risk-free rate) are significantly associated with bank CDS spreads. Second, some CAMELS indicators, including asset quality, cost efficiency, and sensitivity to market risk, contain incremental information for bank CDS prices. Moreover, leverage and asset quality have had a stronger impact on bank CDS since the onset of the recent financial crisis. Banks in countries with lower stock market volatility and/or more financial conglomerates restrictions tend to have lower CDS spreads. Deposit insurance appears to have an adverse effect on CDS spreads, indicating a moral hazard problem. Keywords: bank credit default swaps, structural models, CAMELS, global banks
  • Becchetti, Leonardo; Carpentieri, Andrea; Hasan, Iftekhar (2009)
    Bank of Finland Research Discussion Papers 34/2009
    Published in European Financial Management, Volume 18, Issue 2, March 2012; 183-217
    We analyse the determinants of the variation of option-adjusted credit spreads (OASs) on a unique database that enlarges the traditional scope of analysis to more disaggregated indexes (combining industry, grade and maturity levels), new variables (volumes of sales and purchases of institutional investors) and a complete set of markets (besides the United States, the United Kingdom and the euro area). With our extended set of regressors we explain almost half of the variability of OASs and find evidence of a significant impact of institutional investors purchases and sales on corporate bond risk. We also find that US business cycle indicators significantly affect the variability of OASs in the United Kingdom and the euro area.
  • Hasan, Iftekhar; Massoud, Nadia; Saunders, Anthony; Song, Keke (2015)
    Bank of Finland Research Discussion Papers 3/2015
    Published in Journal of Banking & Finance, Volume 54, May 2015: 87–103
    Tracing the SEC ban on the short selling of financial stocks in September 2008, this paper investigates whether such selling activity before the 2008 short ban reflected financial companies’ risk exposures in the subprime crisis. The evidence suggests that short sellers sold short stocks that had the greatest asset and insolvency risk exposures, and that the short selling of financial firms’ stocks was not significantly greater than that of non-financial firms. When the short ban was in effect, the market quality of financial stocks without subprime asset exposure had deteriorated to a larger degree than that of financial companies with subprime asset exposure. The findings imply that such a regulation may mute the market disciplining effects of investors and may also serve as a counterweight to any perceived macro or systemic risk reduction benefits resulting from such a ban. Keywords: short selling, subprime assets, financial crisis, short-sale ban, CDS spread
  • Marsh, Ian W.; Wagner, Wolf (2012)
    Bank of Finland Research Discussion Papers 6/2012
    We analyse daily lead-lag patterns in US equity and credit default swap (CDS) returns. We first document that equity returns robustly lead CDS returns. However, we find that the CDS-lag is due to common (and not firm-specific) news and arises predominantly in response to positive (instead of negative) equity market news. We provide an explanation for this news-specific price discovery based on dealers in the CDS market exploiting their informational advantage vis-à-vis institutional investors with hedging demands. In support of this explanation we find that the CDS-lag and its news-specificity are related to various firm-level proxies for hedging demand in the cross-section as well measures for economy-wide informational asymmetries over time. Keywords: credit default swap, price discovery, informational efficiency, hedging demand JEL codes: G12, G15, G21