Government Intervention and the CDS Market: A Look at the Market’s Response to Policy Announcements During the 2007-2009 Financial Crisis

Journal of Applied Finance, Spring/Summer 2012, Volume 22, Issue 1, pp. 43-55

Posted: 29 Jul 2012

See all articles by Caitlin Ann Greatrex

Caitlin Ann Greatrex

Fordham University - Department of Economics

Erick W. Rengifo

Fordham University - Department of Economics - Center for International Policy Studies (CIPS)

Date Written: 2012

Abstract

This paper adds to the literature on the financial markets’ reaction to government interventions during the 2007-2009 financial crisis by analyzing the response of US firms’ credit default swap spreads to key government actions. We find that the government measures taken to stabilize both the financial sector and the overall economy were generally well-received by credit default swap (CDS) market participants, reducing perceived credit risk across a broad cross-section of firms. Financial firms responded most favorably to financial sector policies and interest rate cuts, with announcement date abnormal CDS spread changes of -5 and -2 percent, respectively. Non-financial firms responded most favorably to conventional fiscal and monetary policy tools with spread reductions of approximately one percent upon announcement of these measures.

Keywords: Government intervention, financial crisis, Credit default swaps, credit risk

Suggested Citation

Greatrex, Caitlin Ann and Rengifo, Erick W., Government Intervention and the CDS Market: A Look at the Market’s Response to Policy Announcements During the 2007-2009 Financial Crisis (2012). Journal of Applied Finance, Spring/Summer 2012, Volume 22, Issue 1, pp. 43-55. Available at SSRN: https://ssrn.com/abstract=2119196

Caitlin Ann Greatrex (Contact Author)

Fordham University - Department of Economics ( email )

441 E Fordham Rd
Dealy Hall
Bronx, NY 10458
United States

HOME PAGE: http://www.fordham.edu/economics

Erick W. Rengifo

Fordham University - Department of Economics - Center for International Policy Studies (CIPS) ( email )

United States
0017188174061 (Phone)
0017188173518 (Fax)

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