Analysing Credit Default Swap Spreads of European Banks

Författare

Jovita Latakaite
Mihaela Dor Neagu

Summary, in English

This paper investigates the determinants of the credit default swaps changes of 34 European banks between January 2004 and December 2013. The sample period is further divided into four sub-periods covering both calm and turbulent times (pre-crisis, acute phase and less acute phase of the financial crisis, and the most recent European sovereign debt crisis). We show that CDS spread changes are not entirely driven by credit risk. Our main finding is that liquidity, and market and sector specific factors are embedded in the CDS spreads. Moreover, the influence of these determinants appears to be time-varying. We prove that the credit risk specific to the banking sector as well as the CDS liquidity manifest an influence on the changes in the CDS spread in all the sub-samples. Nonetheless, the market volatility changes do not seem to play any role, whereas equity liquidity has explanatory power only prior to the financial crisis. Moreover, we include an alternative channel for explaining CDS spread changes by means of which we control for time-specificity instead of including the market and sector specific variables. This analysis reveals that changes in accounting leverage do not explain CDS spreads fluctuations.

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