Do private signals of a bank s creditworthiness predict the bank s CDS price? : Evidence from the Eurosystem's overnight loan rates

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Title: Do private signals of a bank s creditworthiness predict the bank s CDS price? : Evidence from the Eurosystem's overnight loan rates
Author: Tölö, Eero ; Jokivuolle, Esa ; Virén, Matti
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 9/2014
Year of publication: 2014
Publication date: 25.2.2014
Pages: 46 s.
Keywords: pankkitoiminta; luottokelpoisuus; indikaattorit; Swapit; hinnat; luotot; korot; Eurooppa; eurojärjestelmä; CDS; signaalit; pankkien väliset markkinat; AOR
Abstract: 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.
Rights: https://helda.helsinki.fi/bof/copyright


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