Abstract

http://ssrn.com/abstract=1573377
 
 

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The Impact of Government Interventions on CDS and Equity Markets


Frederic A. Schweikhard


University of Oxford - Oxford-Man Institute of Quantitative Finance; University of Oxford - Said Business School

Zoe Tsesmelidakis


University of Oxford - Oxford-Man Institute of Quantitative Finance; University of Oxford - Said Business School

November 1, 2012

AFA 2012 Chicago Meetings
Finance Meeting EUROFIDAI - AFFI, Paris, December 2011

Abstract:     
We question the impact of government guarantees on the pricing of default risk in credit and stock markets and, using a Merton-type credit model, provide evidence of a structural break in the valuation of U.S. bank debt in the course of the 2007-2009 financial crisis, manifesting in a lowered default boundary, or, under the pre-crisis regime, in higher stock-implied credit spreads. A possible explanation is the asymmetric treatment of debt and equity in rescue measures, which tend to favor creditors. The discrepancies are driven by several factors including firm size, default correlation, and high ratings, thus corroborating our too-big-to-fail hypothesis.

Number of Pages in PDF File: 69

Keywords: Credit risk, Financial crisis, Systemic risk, Too big to fail

JEL Classification: G01, G12, G14, G18

working papers series


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Date posted: March 23, 2010 ; Last revised: November 19, 2012

Suggested Citation

Schweikhard, Frederic A. and Tsesmelidakis, Zoe, The Impact of Government Interventions on CDS and Equity Markets (November 1, 2012). AFA 2012 Chicago Meetings; Finance Meeting EUROFIDAI - AFFI, Paris, December 2011 . Available at SSRN: http://ssrn.com/abstract=1573377 or http://dx.doi.org/10.2139/ssrn.1573377

Contact Information

Frederic A. Schweikhard
University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )
Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom
University of Oxford - Said Business School ( email )
Park End Street
Oxford, OX1 1HP
Great Britain
Zoe Tsesmelidakis (Contact Author)
University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )
Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom
University of Oxford - Said Business School ( email )
Park End Street
Oxford, OX1 1HP
Great Britain
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