scholarly journals Option-Based Credit Spreads

2018 ◽  
Vol 108 (2) ◽  
pp. 454-488 ◽  
Author(s):  
Christopher L. Culp ◽  
Yoshio Nozawa ◽  
Pietro Veronesi
Keyword(s):  
Economic Growth ◽  
Credit Risk ◽  
Risk Premium ◽  
Bond Market ◽  
Credit Spreads ◽  
Put Options ◽  
No Arbitrage ◽  
Primary Determinant ◽  
Default Risks ◽  
Bond Spreads

We present a novel empirical benchmark for analyzing credit risk using “pseudo firms” that purchase traded assets financed with equity and zero-coupon bonds. By no-arbitrage, pseudo bonds are equivalent to Treasuries minus put options on pseudo firm assets. Empirically, like corporate spreads, pseudo bond spreads are large, countercyclical, and predict lower economic growth. Using this framework, we find that bond market illiquidity, investors' overestimation of default risks, and corporate frictions do not seem to explain excessive observed credit spreads but, instead, a risk premium for tail and idiosyncratic asset risks is the primary determinant of corporate spreads. (JEL E23, E32, E44, G13, G24, G32)

scholarly journals THE INTERACTIONS AND TRADE-OFFS OF SOVEREIGN CREDIT DEFAULT SWAP (CDS) AND BOND SPREADS IN A DYNAMIC CONTEXT

2019 ◽  
Vol 20 (3) ◽  
pp. 466-488
Author(s):  
Ioannis A. Tampakoudis ◽  
Andrius Tamošiūnas ◽  
Demetres N. Subeniotis ◽  
Ioannis G. Kroustalis
Keyword(s):  
Credit Risk ◽  
Price Discovery ◽  
Credit Default Swap ◽  
Bond Market ◽  
Discovery Process ◽  
Sovereign Credit ◽  
Credit Default ◽  
Default Swap ◽  
Bond Spreads ◽  
Price Discovery Process

This study provides a dynamic analysis of the lead-lag relationship between sovereign Credit Default Swap (CDS) and bond spreads of the highly indebted southern European countries, considering an extensive time sample from the period before the global financial crisis to the latest developments of the sovereign indebtedness in the euro area. We employ an integrated price discovery methodology on a rolling sample, with the intention to shed light on whether the CDS spreads can trigger rises in bond spreads, and the relative efficiency of credit risk pricing in the CDS and bond markets. In addition, we attempt to depict the evolution of the price discovery process regarding the direction of influence from one market to the other. The rolling window analysis verifies that the price discovery process evolves over time, presenting frequent alternations concerning the leading market. We find that during periods of economic turbulence the CDS market leads the bond market in price discovery, incorporating the new information about sovereign credit risk faster and more efficiently than the bond market does. This regularity should be seriously considered by private and public participants as they make investment and funding decisions. Therefore, the motivation of our paper is to identify the dominant market in terms of price discovery during a period of economic turmoil and, thus, to provide insights for decision making to investment bodies and central governments.

scholarly journals Banking Activities in Kosovo and the Importance of Credit Risk Management

2019 ◽  
Vol 7 (3) ◽  
pp. 35-43
Author(s):  
Arbana Sahiti ◽  
Skender Ahmeti ◽  
Muhamet Aliu
Keyword(s):  
Economic Growth ◽  
Risk Management ◽  
Credit Risk ◽  
Financial Services ◽  
Financial Stability ◽  
Credit Risk Management ◽  
Economic Activities ◽  
Long Term Stability ◽  
Primary Determinant ◽  
And Performance

Banks between the financial services they provide play significant roles in the country's economy The importance of banks in Kosovo is one of the essential catalysts in economic growth. The banking industry based on efficiency and performance industryis the leading indicator of the country's financial stability The pace of economic growth and long-term stability in the country varies from the level of credit and for what economic activities the bank finances. Credit risk is the primary determinant of banking performance. The higher the risk that the higher the risk is the probability of bank loss and vice versa In this study banking activities will be discussed and events in general, as well as an analysis of the financial system especially at banks, with particular emphasis on the importance of credit risk management. 

Dealer Inventory Constraints in the Corporate Bond Market during the COVID Crisis

FEDS Notes ◽  
2021 ◽  
Vol 2021 (2918) ◽  
Author(s):  
Craig A. Chikis ◽  
◽  
Jonathan Goldberg ◽  
Keyword(s):  
Financial Market ◽  
Corporate Bonds ◽  
Bond Market ◽  
Market Liquidity ◽  
Corporate Bond ◽  
Credit Spreads ◽  
Corporate Bond Market ◽  
Inventory Constraints ◽  
Bond Spreads

Beginning in late February 2020, market liquidity for corporate bonds dried up and corporate bond credit spreads soared amid broad financial market dislocations related to the COVID-19 pandemic. The causes of this liquidity dry-up and the spike in corporate bond spreads remain subjects of debate.

Asset Securitizations and Credit Risk

2011 ◽  
Vol 87 (2) ◽  
pp. 423-448 ◽  
Author(s):  
Mary E. Barth ◽  
Gaizka Ormazabal ◽  
Daniel J. Taylor
Keyword(s):  
Credit Risk ◽  
Financial Reporting ◽  
Credit Rating ◽  
Credit Ratings ◽  
Bond Market ◽  
Credit Rating Agencies ◽  
Rating Agencies ◽  
Bond Spreads ◽  
Insight Into

ABSTRACT This study examines the sources of credit risk associated with asset securitizations and whether credit-rating agencies and the bond market differ in their assessment of this risk. Measuring credit risk using credit ratings, we find the securitizing firm's credit risk is positively related to the firm's retained interest in the securitized assets and unrelated to the portion of the securitized assets not retained by the firm. Measuring credit risk using bond spreads, we find the securitizing firm's credit risk is positively related to both the firm's retained interest in the assets and the portion of the securitized assets not retained by the firm. Additionally, our findings indicate the bond market does not distinguish between the retained and non-retained portions of the securitized assets when assessing the credit risk of the securitizing firm. These different assessments of sources of credit risk associated with asset securitizations provide insight into ongoing controversies surrounding the financial reporting for asset securitizations and the efficacy of credit ratings.

scholarly journals How Sovereign Is Sovereign Credit Risk?

2011 ◽  
Vol 3 (2) ◽  
pp. 75-103 ◽  
Author(s):  
Francis A Longstaff ◽  
Jun Pan ◽  
Lasse H Pedersen ◽  
Kenneth J Singleton
Keyword(s):  
Credit Risk ◽  
Risk Premium ◽  
Default Risk ◽  
Principal Component ◽  
Credit Spread ◽  
Credit Spreads ◽  
High Yield ◽  
Sovereign Credit ◽  
The Us ◽  
Sovereign Credit Risk

We study the nature of sovereign credit risk using an extensive set of sovereign CDS data. We find that the majority of sovereign credit risk can be linked to global factors. A single principal component accounts for 64 percent of the variation in sovereign credit spreads. Furthermore, sovereign credit spreads are more related to the US stock and high-yield markets than they are to local economic measures. We decompose credit spreads into their risk premium and default risk components. On average, the risk premium represents about a third of the credit spread. (JEL F34, G15, O16, O19, P34)

scholarly journals Effective transfer entropy to measure information flows in credit markets

2021 ◽  
Author(s):  
Nicoló Andrea Caserini ◽  
Paolo Pagnottoni
Keyword(s):  
Credit Risk ◽  
Bond Market ◽  
Small Sample ◽  
Transfer Entropy ◽  
Information Flows ◽  
Directional Information ◽  
Crisis Period ◽  
Model Free ◽  
Effective Transfer ◽  
Sovereign Bond Markets

AbstractIn this paper we propose to study the dynamics of financial contagion between the credit default swap (CDS) and the sovereign bond markets through effective transfer entropy, a model-free methodology which enables to overcome the required hypotheses of classical price discovery measures in the statistical and econometric literature, without being restricted to linear dynamics. By means of effective transfer entropy we correct for small sample biases which affect the traditional Shannon transfer entropy, as well as we are able to conduct inference on the estimated directional information flows. In our empirical application, we analyze the CDS and bond market data for eight countries of the European Union, and aim to discover which of the two assets is faster at incorporating the information on the credit risk of the underlying sovereign. Our results show a clear and statistically significant prominence of the bond market for pricing the sovereign credit risk, especially during the crisis period. During the post-crisis period, instead, a few countries behave dissimilarly from the others, in particular Spain and the Netherlands.

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