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The Impact of Government Interventions on CDS and Equity MarketsFrederic SchweikhardUniversity of Oxford - Oxford-Man Institute of Quantitative Finance; University of Oxford - Said Business School Zoe TsesmelidakisUniversity 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 seriesDate posted: March 23, 2010 ; Last revised: November 19, 2012Suggested CitationContact Information
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