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Do CDS spread determinants affect the probability of default? A study on the EU banks

Author

Listed:
  • Alessandra Ortolano

    (G. d’Annunzio University, Department of Economic Studies)

  • Eliana Angelini

Abstract

The paper is an investigation of the principal variables that have affected the EU banks’ credit risk over the decade 2006–2016. In this context we adopt panel Tobit regressions in order to infer our object of analysis on the most significant CDS spread determinants illustrated by recent literature. In fact, the CDS spread should give a measure of credit risk, expressed by the probability of default. In accordance with the insertion of balance sheet, macroeconomic and market variables, we estimate the probability of default through a two-equation Merton model. Our results are analogous with the main trend of CDS spread determinants over time and contribute to continuing to consider the price of credit default swaps as a good indicator of banks’ creditworthiness.

Suggested Citation

  • Alessandra Ortolano & Eliana Angelini, 2020. "Do CDS spread determinants affect the probability of default? A study on the EU banks," Bank i Kredyt, Narodowy Bank Polski, vol. 51(1), pages 1-32.
    • Handle: RePEc:nbp:nbpbik:v:51:y:2020:i:1:p:1-32
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    File URL: https://bankikredyt.nbp.pl/content/2020/01/BIK_01_2020_01.pdf
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    More about this item

    Keywords

    probability of default; banks; structural models; CDS spread;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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