Research Discussion Papers, Bank of Finland
Do private signals of a bank’s creditworthiness predict the bank’s CDS price? Evidence from the Eurosystem's overnight loan rates
(), Esa Jokivuolle
() and Matti Viren
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.
Keywords: overnight loans rates; credit default swap; TARGET2; Eurosystem; early-warning indicators; (follow links to similar papers)
JEL-Codes: G01; G14; G21; (follow links to similar papers)
40 pages, February 26, 2014
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