Do CDS spreads reflect default risks? Evidence from UK bank bailouts

Constantinou, N., Vinogradov, D. and Takeyama, A. (2010) Do CDS spreads reflect default risks? Evidence from UK bank bailouts. Working Paper. Essex Finance Centre.

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CDS spreads are generally considered to reflect the credit risks of their reference entities. However, CDS spreads of the major UK banks remained relatively stable in response to the recent credit crisis. We suggest that this can be explained by changes in loss given default (LGD). To obtain the result we first derive the probabilities of default from stock option prices and then determine the LGD consistent with actual CDS spreads. Our results reveal a significant decrease in the LGD of bailed out banks over the observed period in contrast to banks which were not bailed out and non-financial companies.

Item Type:Research Reports or Papers (Working Paper)
Glasgow Author(s) Enlighten ID:Vinogradov, Professor Dmitri
Authors: Constantinou, N., Vinogradov, D., and Takeyama, A.
College/School:College of Social Sciences > Adam Smith Business School > Accounting and Finance
Publisher:Essex Finance Centre
Copyright Holders:Copyright © 2010 The Authors
Publisher Policy:Reproduced in accordance with the copyright policy of the publisher

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