Credit Default Swaps as Indicators of Bank Financial Distress

41 Pages Posted: 6 Dec 2015 Last revised: 14 Apr 2019

See all articles by Davide E. Avino

Davide E. Avino

University of Liverpool; Financial Mathematics and Computation Cluster

Thomas Conlon

University College Dublin

John Cotter

University College Dublin; University of California, Los Angeles (UCLA) - Anderson School of Management

Date Written: March 3, 2019

Abstract

We examine whether CDS contracts written on individual banks are effective leading indicators of bank financial distress during a period of systemic bank crisis. Changes in CDS spreads are found to yield a robust signal of failure across a set of European and US banks, in keeping with indirect market discipline. Furthermore, changes in CDS spreads provide information about the condition of banks which supplements that available from equity markets and contained in accounting metrics. Consistent results are detailed for both senior and subordinated CDS spreads. Our results hold out-of-sample, for logit and proportional hazards models, for various cohorts, for idiosyncratic changes in CDS and are robust to the use of alternative measures of bank distress, including rating downgrades and accounting risk.

Keywords: Bank Failure, Market Discipline, Credit Default Swap, CDS

JEL Classification: G21, G20, G33, G18

Suggested Citation

Avino, Davide E. and Conlon, Thomas and Cotter, John, Credit Default Swaps as Indicators of Bank Financial Distress (March 3, 2019). Journal of International Money and Finance, Vol. 94, pp. 132-139, 2019. Available at SSRN: https://ssrn.com/abstract=2699175 or http://dx.doi.org/10.2139/ssrn.2699175

Davide E. Avino

University of Liverpool ( email )

Chatham Street
Liverpool, L69 7ZA
United Kingdom

Financial Mathematics and Computation Cluster

Dublin
Ireland

Thomas Conlon (Contact Author)

University College Dublin ( email )

Smurfit Graduate Business School
Blackrock
Co. Dublin, n/a
Ireland

HOME PAGE: http://www.ucd.ie/bankingfinance/staff/drthomasconlon/

John Cotter

University College Dublin ( email )

School of Business, Carysfort Avenue
Blackrock, Co. Dublin
Ireland
353 1 716 8900 (Phone)
353 1 283 5482 (Fax)

HOME PAGE: http://www.ucd.ie/bankingfinance/staff/professorjohncotter/

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
178
Abstract Views
1,174
rank
171,674
PlumX Metrics