Good and bad credit contagion: Evidence from credit default swaps☆

Jorion, Philippe; Zhang, Gaiyan

doi:10.1016/j.jfineco.2006.06.001

Cited by 490 publications

(314 citation statements)

References 27 publications

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“…Thus, when investors suffer a large loss, they are forced to liquidate their positions in other investments, triggering cross-market portfolio rebalancing. This finding complements Jorion and Zhang (2007) who examine contagion channels between CDS and stock markets. 20 The Gibbs sampler has been seldom used to estimate Markov-switching vector autoregression models.…”

Section: Resultssupporting

confidence: 72%

The quest for banking stability in the euro area: The role of government interventions

Kizys

Paltalidis

Vergos

2016

Journal of International Financial Markets, Institutions and Mo

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Use policyThe full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-prot purposes provided that:• a full bibliographic reference is made to the original source • a link is made to the metadata record in DRO • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders.Please consult the full DRO policy for further details. AbstractWe build upon a Markov-Switching Bayesian Vector Autoregression (MSBVAR) model to study how the credit default swaps market in the euro area becomes an important chain in the propagation of shocks through the entire financial system. The study sheds light on the regime-dependent interconnectedness between the risk of investing in banking and public sector bonds and provides novel evidence that a rise in sovereign debt, due to the countercyclical fiscal policy measures, is perceived by stock market investors as a burden on growth prospects. We also document that government interventions in the banking sector deteriorate the credit risk of sovereign debt. Higher risk premium required by investors for holding riskier government bonds depresses the sovereign debt market, it impairs banks" balance sheets, and it depresses the collateral value of loans leading to bank retrenchment. The ensuing two-way banking-fiscal feedback loop indicates that government interventions do not necessarily stabilize the banking sector.JEL Classification: C11, C58, G01, G21, G28.

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Section: Resultssupporting

confidence: 72%

The quest for banking stability in the euro area: The role of government interventions

Kizys

Paltalidis

Vergos

2016

Journal of International Financial Markets, Institutions and Mo

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“…When interpreting this metric one should always be cautious as it can lead to performance assessment issues when the dataset is skewed, and skewed data is a common occurrence with real world credit-scoring datasets. Arguably a more useful measure is the balanced accuracy (BAC) as in (5). This measure avoids the misleading affects on accuracy caused by imbalanced datasets by showing the arithmetic mean of sensitivity and specificity.…”

Section: Resultsmentioning

confidence: 99%

“…Thus a series of notes of different seniorities given ratings ranging from AAA to high yielding by credit rating agencies were issued. Having received the "blessings" of the credit rating agencies and the protection provided by other banks and insurance agencies through credit default swaps, investors around the world were willing to purchase CDO bonds [5] . Figure 1 illustrates the cash flows from a mortgaged backed CDO transaction.…”

Section: The Cause Of the Crisismentioning

confidence: 99%

Default definition selection for credit scoring

Harris¹

2013

AIR

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In this paper some of the main causes of the recent financial crisis are briefly discussed. Specific attention is paid to the accuracy of credit-scoring models used to assess consumer credit risk. As a result, the optimal default definition selection (ODDS) algorithm is proposed to improve credit-scoring for credit risk assessment. This simple algorithm selects the best default definition for use when building credit scorecards. To assess ODDS, the algorithm was used to select the default definition for the random forest tree algorithm. The resulting classification models were compared to other models built using the unselected default definitions. The results suggest that the models developed using the default definition selected by the ODDS algorithm were statistically superior to the models developed using the unselected default indicators.

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“…More recent studies observe abnormal returns on stocks and bonds prices and mostly conclude that rating changes deliver valuable information to the market (see, for example, Ingram et al, 1983;Hand et al, 1992;or Dichev and Piotroski, 2001). Later studies, such as Norden and Weber (2004) and Hull et al (2004), examine the credit default swap CDS market, Steiner and Heinke (2001) consider all three types of rating actions (actual rating changes, watchlist assignments, and outlook assignments), and Jorion and Zhang (2007) analyze the influence of determinant factors like the credit rating prior to the change. In general, there is considerable evidence that negative rating announcements, particularly reviews for downgrade and downgrades, do in fact disclose information relevant to the formation of prices.…”

Section: Introductionmentioning

confidence: 99%

Credit rating announcements, trading activity and yield spreads: the Spanish evidence

Romero

ndez

2012

IJMEF

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Abstract:We test whether or not different rating announcements contain pricing-relevant information and modify trading activity patterns in the Spanish commercial paper and corporate bond markets. We observe a statistically significant widening of yield spreads in both segments of the corporate debt market after reviews of downgrades and negative outlook reports. In addition, we find that certain rating announcements encourage trading activity even when the information is not pricing-relevant. The release of information arouses investor interest for the involved securities. Thus, trading frequency increases, although larger-sized transactions, which should denote possible portfolio rebalancing, are not observed. In the commercial paper note market, we also find that that trading volumes fade away after reviews for downgrade. Investors seem to prefer reducing the trading of these short-term securities to liquidating their positions.

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Good and bad credit contagion: Evidence from credit default swaps☆

Cited by 490 publications

References 27 publications

The quest for banking stability in the euro area: The role of government interventions

The quest for banking stability in the euro area: The role of government interventions

Default definition selection for credit scoring

Credit rating announcements, trading activity and yield spreads: the Spanish evidence

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