Working Papers,
Lund University, Department of Economics

Abstract: Using different measures of how the Covid-19 pandemic progresses we find that the level of credit risk among US blue chip companies increases in tandem with the Covid-19 virus spreading. The credit risk increases dramatically during the pandemic, but we find it to be short of the levels seen during the 2008–2009 financial crisis. Furthermore, we find weekly ups and downs in credit risk and virus impact to be significantly positively correlated throughout the pandemic. Finally, Basel II capital requirements increase drastically when the pandemic strikes but, again, not to the levels seen during the financial crisis.

Keywords: credit risk; Covid-19; equity market; debt market; CDS; Merton model; Basel II

JEL-codes: G10; G33; I18

31 pages, January 4, 2021

Note: Forthcoming in Journal of Fixed Income

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