Financial Sector Linkages and the Dynamics of Bank and Sovereign Credit Spreads

René Kallestrup, David Lando, Agatha Murgoci

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

We show that nancial linkages between banks across borders are priced in the CDS markets beyond what can be explained by exposure to common factors. Information on the relative size and riskiness of aggregate exposures of banks in one country to non-nationals is used to construct a dynamic measure of the risk arising from cross-border exposures. We also construct a measure which in addition takes into account the relative size and riskiness of bank exposures to domestic government bonds and other domestic residents. Both measures help explaining the dynamics of bank CDS premia after controlling for country specic and global risk factors. Finally, a dynamic measure of the size of the implicit guarantee, that the sovereign may be assumed to extend for the domestic banking system, strongly impacts sovereign CDS premia.
We show that nancial linkages between banks across borders are priced in the CDS markets beyond what can be explained by exposure to common factors. Information on the relative size and riskiness of aggregate exposures of banks in one country to non-nationals is used to construct a dynamic measure of the risk arising from cross-border exposures. We also construct a measure which in addition takes into account the relative size and riskiness of bank exposures to domestic government bonds and other domestic residents. Both measures help explaining the dynamics of bank CDS premia after controlling for country specic and global risk factors. Finally, a dynamic measure of the size of the implicit guarantee, that the sovereign may be assumed to extend for the domestic banking system, strongly impacts sovereign CDS premia.

Conference

ConferenceThe 39th European Finance Association Annual Meeting (EFA 2012)
Number39
LocationCopenhagen Business School
CountryDenmark
CityFrederiksberg
Period15/08/201218/08/2012
Internet address

Keywords

    Cite this

    Kallestrup, R., Lando, D., & Murgoci, A. (2012). Financial Sector Linkages and the Dynamics of Bank and Sovereign Credit Spreads. Paper presented at The 39th European Finance Association Annual Meeting (EFA 2012), Frederiksberg, Denmark.DOI: 10.2139/ssrn.2023635
    Kallestrup, René ; Lando, David ; Murgoci, Agatha. / Financial Sector Linkages and the Dynamics of Bank and Sovereign Credit Spreads. Paper presented at The 39th European Finance Association Annual Meeting (EFA 2012), Frederiksberg, Denmark.44 p.
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    Kallestrup, R, Lando, D & Murgoci, A 2012, 'Financial Sector Linkages and the Dynamics of Bank and Sovereign Credit Spreads' Paper presented at, Frederiksberg, Denmark, 15/08/2012 - 18/08/2012, . DOI: 10.2139/ssrn.2023635

    Financial Sector Linkages and the Dynamics of Bank and Sovereign Credit Spreads. / Kallestrup, René; Lando, David; Murgoci, Agatha.

    2012. Paper presented at The 39th European Finance Association Annual Meeting (EFA 2012), Frederiksberg, Denmark.

    Research output: Contribution to conferencePaperResearchpeer-review

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    T1 - Financial Sector Linkages and the Dynamics of Bank and Sovereign Credit Spreads

    AU - Kallestrup,René

    AU - Lando,David

    AU - Murgoci,Agatha

    PY - 2012

    Y1 - 2012

    N2 - We show that nancial linkages between banks across borders are priced in the CDS markets beyond what can be explained by exposure to common factors. Information on the relative size and riskiness of aggregate exposures of banks in one country to non-nationals is used to construct a dynamic measure of the risk arising from cross-border exposures. We also construct a measure which in addition takes into account the relative size and riskiness of bank exposures to domestic government bonds and other domestic residents. Both measures help explaining the dynamics of bank CDS premia after controlling for country specic and global risk factors. Finally, a dynamic measure of the size of the implicit guarantee, that the sovereign may be assumed to extend for the domestic banking system, strongly impacts sovereign CDS premia.

    AB - We show that nancial linkages between banks across borders are priced in the CDS markets beyond what can be explained by exposure to common factors. Information on the relative size and riskiness of aggregate exposures of banks in one country to non-nationals is used to construct a dynamic measure of the risk arising from cross-border exposures. We also construct a measure which in addition takes into account the relative size and riskiness of bank exposures to domestic government bonds and other domestic residents. Both measures help explaining the dynamics of bank CDS premia after controlling for country specic and global risk factors. Finally, a dynamic measure of the size of the implicit guarantee, that the sovereign may be assumed to extend for the domestic banking system, strongly impacts sovereign CDS premia.

    KW - Credit risk

    KW - Banks

    KW - Sovereign risk

    U2 - 10.2139/ssrn.2023635

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    Kallestrup R, Lando D, Murgoci A. Financial Sector Linkages and the Dynamics of Bank and Sovereign Credit Spreads. 2012. Paper presented at The 39th European Finance Association Annual Meeting (EFA 2012), Frederiksberg, Denmark. Available from, DOI: 10.2139/ssrn.2023635