Firm and Guarantor Risk, Risk Contagion and the Interfirm Spread Among Insured Deposits

JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS, June 1996

Posted: 28 Jun 1998

See all articles by Douglas O. Cook

Douglas O. Cook

University of Alabama - Culverhouse College of Commerce & Business Administration

Lewis J. Spellman

University of Texas at Austin - Department of Finance

Abstract

We develop a model of third-party guaranteed debt and show that interest rate premiums are multiplicatively related to firm and guarantor risk. We apply the model to thrifts issuing CDs guaranteed by the FSLIC and then estimate firm probabilities of insolvency and guarantor risk across 20 observed months. This time period spans the insolvency of the guarantor followed by two recapitalizations. The relative stability in firm risk across time offers no evidence of generalized risk contagion among firms. We attribute elevated CD premiums and rate spreads to increases in guarantor risk rather than changes in firm risk.

JEL Classification: G10, G18, G21

Suggested Citation

Cook, Douglas O. and Spellman, Lewis J., Firm and Guarantor Risk, Risk Contagion and the Interfirm Spread Among Insured Deposits. JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS, June 1996, Available at SSRN: https://ssrn.com/abstract=7390

Douglas O. Cook (Contact Author)

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States
205-348-8971 (Phone)
205-348-0590 (Fax)

Lewis J. Spellman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-5875 (Phone)
512-327-8701 (Fax)

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