The CDS-Loan Basis Across Firms and the Business Cycle

Posted: 5 Aug 2019 Last revised: 16 Oct 2019

See all articles by Danilo Drago

Danilo Drago

Università degli Studi della Calabria

Concetta Carnevale

Università degli Studi della Calabria - Dipartimento di Scienze Aziendali e Giuridiche

Raffaele Gallo

Bank of Italy - Research Department

Date Written: July 1, 2019

Abstract

We analyze the difference between credit default swap (CDS) and syndicated loan spreads, defined as the “CDS-loan basis”. Our results indicate that the CDS-loan basis is greater when the cost of information asymmetry is higher, such as for riskier borrowers and in economic downturns. Our findings suggest that loan spreads applied to riskier borrowers are less correlated with the business cycle than CDS spreads. Overall, our analysis is consistent with the hypothesis that, at least in part, banks still play a special role in the current financial system compared with other investors.

Keywords: syndicated loan, credit default swaps, loan spread, business cycle, bank

JEL Classification: G10, G21, G23, G32

Suggested Citation

Drago, Danilo and Carnevale, Concetta and Gallo, Raffaele, The CDS-Loan Basis Across Firms and the Business Cycle (July 1, 2019). Available at SSRN: https://ssrn.com/abstract=3430434 or http://dx.doi.org/10.2139/ssrn.3430434

Danilo Drago

Università degli Studi della Calabria ( email )

Concetta Carnevale

Università degli Studi della Calabria - Dipartimento di Scienze Aziendali e Giuridiche ( email )

Via P. Bucci
Arcavacata
rende (CS), cosenza 87036
Italy

Raffaele Gallo (Contact Author)

Bank of Italy - Research Department ( email )

Via Nazionale 91
00184 Roma
Italy

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