The Impact of the European Debt Crisis to the Pricing of EU Sovereigns’ CDS, Bond and Basis Spreads
Katajamäki, Jukka (2012)
2012
Kuvaus
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Tiivistelmä
The collapse of the Lehman Brothers investment bank has caused the global financial crisis, which led to increased levels in the countries CDS spreads, while for some countries the collapse drove down the bond spreads.
In this thesis, fourteen developed European countries’ credit default swap (CDS), bond and basis spreads are studied. The effects of the financial crisis and the European debt crisis are studied on the regional level. The main findings are that the European debt crisis has changed the pricing of the CDS and bond spreads, especially for the countries that are a part of the Economic and Monetary Union of the European Union (EMU). The EMU countries’ credit spreads have become more sensitive to the changes in the determinants, and the most prominent change is for the GIISP countries (Greece, Ireland, Italy, Spain and Portugal). The most significant determinant for the CDS and bond spreads is the exchange rate between the US dollar and the local currency; the second is the size of local financials. In addition to these findings, the bond spreads are less sensitive to the changes in the determinants than the CDS spreads are.
The bond and the CDS for the same maturity and entity should price the risk in the same way. Deviation from this zero-difference is called basis spread. Some of the GIISP countries have persistent negative basis during the European debt crisis, namely Greece, Ireland and Portugal. The same determinants are tested for the basis spreads on the country level. The main finding is that there is a change in the pricing of the basis spreads on the country level between the two sub-periods.
In this thesis, fourteen developed European countries’ credit default swap (CDS), bond and basis spreads are studied. The effects of the financial crisis and the European debt crisis are studied on the regional level. The main findings are that the European debt crisis has changed the pricing of the CDS and bond spreads, especially for the countries that are a part of the Economic and Monetary Union of the European Union (EMU). The EMU countries’ credit spreads have become more sensitive to the changes in the determinants, and the most prominent change is for the GIISP countries (Greece, Ireland, Italy, Spain and Portugal). The most significant determinant for the CDS and bond spreads is the exchange rate between the US dollar and the local currency; the second is the size of local financials. In addition to these findings, the bond spreads are less sensitive to the changes in the determinants than the CDS spreads are.
The bond and the CDS for the same maturity and entity should price the risk in the same way. Deviation from this zero-difference is called basis spread. Some of the GIISP countries have persistent negative basis during the European debt crisis, namely Greece, Ireland and Portugal. The same determinants are tested for the basis spreads on the country level. The main finding is that there is a change in the pricing of the basis spreads on the country level between the two sub-periods.