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

64 Pages Posted: 17 Mar 2012 Last revised: 16 Apr 2013

See all articles by Rene Kallestrup

Rene Kallestrup

Capital Four Management

David Lando

Copenhagen Business School

Agatha Murgoci

Aarhus University - School of Business and Social Sciences

Date Written: March 28, 2013

Abstract

We show that cross-border financial linkages are priced in CDS markets. We construct a measure of the foreign exposure risk of a country's banking system based on the composition of its foreign exposures. Our measure helps explain CDS premia of banks. Implicit and explicit guarantees extended to a country's banking system in turn aff ect the CDS premia of the sovereign. As a consequence, foreign exposures of banks impact the dynamics of sovereign CDS spreads. Another measure including both foreign and domestic assets of the banks is highly signi cant in explaining bank CDS spreads even before the onset of the crisis.

Keywords: Credit risk, banks, sovereign risk

JEL Classification: G01, G15, G21

Suggested Citation

Kallestrup, Rene and Lando, David and Murgoci, Agatha, Financial Sector Linkages and the Dynamics of Bank and Sovereign Credit Spreads (March 28, 2013). Available at SSRN: https://ssrn.com/abstract=2023635 or http://dx.doi.org/10.2139/ssrn.2023635

Rene Kallestrup

Capital Four Management ( email )

Denmark

David Lando

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
+45 3815 3600 (Fax)

Agatha Murgoci (Contact Author)

Aarhus University - School of Business and Social Sciences ( email )

Nordre Ringgade 1
Aarhus C, DK-8000
Denmark

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