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

13 Pages Posted: 17 Nov 2015

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: November 12, 2015

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.

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 (November 12, 2015). Journal of Applied Finance (Formerly Financial Practice and Education), Vol. 22, No. 1, 2012. Available at SSRN: https://ssrn.com/abstract=2689890

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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