Burkhard Raunig and Martin Scheicher Oesterreichische Nationalbank (OeNB)
February 16, 2009
This paper uses regression analysis to compare the market pricing of the default risk of banks to that of other firms. The authors study how CDS traders discriminate between banks and other type of firms and how their judgement changes over time, in particular, since the start of the recent financial turmoil. The authors use monthly data on the Credit Default Swaps (CDS) of 41 major banks and 162 non-banks. By means of panel analysis, they decompose the CDS premia into the expected loss and the risk premium. The authors’ primary result is that market participants indeed viewed banks differently and that they drastically changed their mind during the recent turmoil that started in August 2007.
Very important piece of work, reflecting the 'now' way to do it! (in my view).