The determinants of credit default swap spreads in the presence of structural breaks and counterparty risk

By investigating the determinants of CDS spreads on European contracts before and after the recent crisis we observe significant differences in the explanatory power of market and firm-specific variables. Before the crisis, the underlying credit risk in the overall CDS market is sufficient to explain credit risk. During the crisis investors have a differing view on the risk of financial and non-financial contracts; whereas non-financial CDS contracts reflect the credit risk of the counterparty, financial contracts do not. Our results suggest that in case of default of financial firms, investors expect the government to intervene to alleviate credit risk of the counterparty and fears of systemic risk

The Cross-Section of Interbank Rates: A Nonparametric Empirical Investigation

This paper analyzes the distribution of lending and borrowing credit spreads in the European interbank market conditional on main features of banks such as their size, operating currency and nationality. This is done by means of nonparametric kernel estimation methods for the cross-sectional density of interbank funding rates over a large sample of European banks trading in the e-MID market. The analysis is repeated over consecutive non-overlapping periods in order to assess and compare the effect of the factors during crisis and non-crisis periods. We find evidence of important differences between the borrowing and lending segment of the interbank market that are augmented during crises periods. Our results strongly support the existence of a size effect in the borrowing market. Largest banks enjoy the highest lending rates and the lowest borrowing rates. The collapse of Lehman Brothers accentuates the differences in funding conditions. In both borrowing and lending segments, crises are corresponded by high volatilities in daily funding costs. Banks using the Euro currency and in countries not affected by sovereign debt crises are benefited by lower funding costs. Our nonparametric analysis of densities conditional on banks' nationality suggests that distress in the interbank market can serve as an early warning indicator of sovereign risk

The effects of 2007-2008 crisis on the CDS and the interbank markets: Empirical investigations

The global crisis of 2007-2008 is the most severe crisis since the Great Depression in the financial markets. Starting with the subprime defaults in the United States, it quickly spills over into other markets leading to the collapses of many financial institutions, bail-outs of banks worldwide and downturns in asset prices. The aim of this thesis is to investigate the repercussions of this crisis on CDS and interbank market and provide empirical evidence on the changes in the pricing of CDS contracts and interbank deposits. Chapter 2 discusses the determinants of CDS spread changes on European contracts. The most remarkable finding of the study is that the relation between credit spreads and their determinants is regime dependant and depends on the sector of economic activity. Before the crisis the underlying credit risk in the overall CDS market is sufficient to explain credit risk. During the crisis investors have a differing view on the risk of financial and non--financial contracts Interestingly, non-financial CDS contracts reflect the credit risk of the counterparty, but financial contracts do not. This implies that governments are expected to bail out dealers to prevent systemic risk. Chapter 3 provides further insight into the European corporate CDS spreads and proposes an equilibrium model accommodating the occurrence of structural breaks in the long-run relationship between the variables. These breaks are endogenously determined within unit root specifications used to describe the dynamics of the explanatory factors. The findings highlight that crisis shocks are persistent and have the potential to change long-run equilibrium dynamics. The systematic credit risk factor is proxied by the European iTraxx index and the idiosyncratic factor by the stock price of reference entity. The model indicates that stock market leads price discovery process. Vector error correction model confirms the strong predictive ability of the iTraxx index and the error correcting vector for changes in the CDS spreads. Chapter 4 focuses on European interbank market and has two main contributions. First, it estimates the cross-sectional density of interbank funding rates using nonparametric kernel methods. Second, it analyzes the effect of banks size, the operating currency and banks' nationality on the cross-sectional distribution of these rates. The findings strongly support the statistical significance of these effects and highlight the importance of these factors as early warning indicators of financial distress. Prior to the crisis, the borrowing segment of the market exhibits distinctive features such as highly volatile and multimodal distributions suggesting the occurrence of distortions in the cross-section of funding rates. During crisis, large domestic banks operating in Euros enjoy the most favourable rates. Banks' nationality analysis further confirms that interbank market provided early warning signals of incoming sovereign crisis

Centralized vs Decentralized Markets in the Laboratory: The Role of Connectivity

This paper compares the performance of centralized and decentralized markets experimentally. We constrain trading exchanges to happen on an exogenously predetermined network, representing the trading relationships in markets with differing levels of connectivity. Our experimental results show that, despite having lower trading volumes, decentralized markets are generally not less efficient. Although information can propagate quicker through highly connected markets, we show that higher connectivity also induces informed traders to trade faster and exploit further their information advantages before the information becomes fully incorporated into prices. This not only reduces market efficiency, but it increases wealth inequality. We show that, in more connected markets, informed traders trade not only relatively quicker, but also more, in the right direction, despite not doing it at better prices

Bank characteristics and the interbank money market: a distributional approach

This paper studies the relationship between bank characteristics, such as size, nationality, operating currency and sovereign debt in the parent country, and the distribution of funding spreads observed in the e-MID interbank money market during the Great financial crisis. Our setup is a pseudo-panel with a random number of international banks acting in the interbank market in each period. We develop new econometric tools for panel data with random effects and discrete covariates, such as a nonparametric kernel estimator of the distribution function of the response variable conditional on a set of covariates and a consistent test of first order stochastic dominance. Our empirical results, based on these tests, shed light on the survivorship bias in the e-Mid market, and reveal the existence of a risk premium on small banks, banks with currencies different from the Euro, and banks based on countries under sovereign debt distress in the periphery of the European Union. Finally we assess the impact of policy intervention in the aftermath of the financial crisis

Market microstructure, banks’ behaviour and interbank spreads: evidence after the crisis

We present a study of the European electronic interbank market of overnight lending (e-MID) before and after the beginning of the financial crisis. The main goal of the paper is to explain the structural changes of lending/borrowing features due to the liquidity turmoil. Unlike previous contributions that focused on banks' dependent and macro information as explanatory variables, we address the role of banks' behaviour and market microstructure as determinants of the credit spreads. We show that all banks experienced significant variations in their liquidity costs due to the sensitivity of interbank rates to the timing and side of trades. We argue that, while larger banks did experience better funding conditions after the crisis, this was not just a consequence of the \too big to fail" perception of the market. Larger banks have been able to play more strategically when managing their liquidity by taking advantage of the changing market microstructure

Bank characteristics and the interbank money market: A distributional approach

This paper studies the relationship between bank characteristics, such as size, nationality, operating currency and sovereign debt in the parent country, and the distribution of funding spreads observed in the e-MID interbank money market during the Great financial crisis. Our setup is a pseudo-panel with a random number of international banks acting in the interbank market in each period. We develop new econometric tools for panel data with random effects and discrete covariates, such as a nonparametric kernel estimator of the distribution function of the response variable conditional on a set of covariates and a consistent test of first order stochastic dominance. Our empirical results, based on these tests, shed light on the survivorship bias in the e-Mid market, and reveal the existence of a risk premium on small banks, banks with currencies different from the Euro, and banks based on countries under sovereign debt distress in the periphery of the European Union. Finally we assess the impact of policy intervention in the aftermath of the financial crisis

Long-run risk dynamics, instabilities, and breaks on European credit markets over a crisis period

This article investigates the role of the long-run determinants of European corporate credit default swap (CDS) spreads during the recent financial crisis. The authors divide the determinants of CDS spreads into systematic and idiosyncratic factors and propose an equilibrium model that accommodates the occurrence of structural breaks in the long-run relationship between the variables. These breaks, interpreted as outlying observations, are endogenously determined within unit root specifications used to describe the dynamics of the explanatory factors.The authors observe that crisis shocks are persistent and have the potential to change long-run equilibrium dynamics. The systematic credit risk factor is proxied by the European iTraxx portfolio, and the idiosyncratic factor, by the stock price corresponding to each CDS contract. Exogeneity tests applied to this novel econometric specification reveal that, for these contracts, the credit risk discovery process is in the factors, not in the CDS market. R-squared measures corresponding to the vector error-correction representation of the equilibrium model confirm the strong predictive ability of the iTraxx portfolio and the error-correcting vector for changes in the CDS spreads. Stock returns do not exhibit predictive power, however

Market microstructure, banks’ behaviour and interbank spreads: evidence after the crisis

We present a study of the European electronic interbank market of overnight lending (e-MID) before and after the beginning of the financial crisis. The main goal of the paper is to explain the structural changes of lending/borrowing features due to the liquidity turmoil. Unlike previous contributions that focused on banks’ dependent and macro information as explanatory variables, we address the role of banks’ behaviour and market microstructure as determinants of the credit spreads. We show that all banks experienced significant variations in their liquidity costs due to the sensitivity of interbank rates to the timing and side of trades. We argue that, while larger banks did experience better funding conditions after the crisis, this was not just a consequence of the “too big to fail” perception of the market. Larger banks have been able to play more strategically when managing their liquidity by taking advantage of the changing market microstructure

Retrospective Analysis of Chronic Rheumatic Cardiac Diseases and Its Complications in the South Kazakhstan Region

Approximately 60% of literatures, which have published about rheumatic diseases in recent years, devoted to chronic rheumatic cardiac diseases /1,2/. Everyone knows that the chronic rheumatic cardiac diseases and complications appearing from these diseases have a direct impact on the development of cardiovascular diseases, early disability of patients, reduction in life expectancy of patients / 3.4 /.Due to this situation, chronic rheumatic cardiac diseases (CRCD) and complications appearing from these diseases are the topic of the day not only for society but also for the everyday work of qualified doctors / 1,3 /. Very important early detection of affections and complications developing from the chronic rheumatic cardiac diseases in order to improve the quality of these patients' life and use of prophylactic measures can help us to save not only social, but also the state budget / 5,6 /.Therefore, at the moment a study of CRCD and its complications has become the topic of the day. In problem solution help not only modern clinical, laboratory and tooling researches but also the retrospective analysis of patient's medical history