Sovereign Risk in CDS Pricing
In the course of the financial crisis and the subsequent Euro crisis it was revealed that government bonds are by no means riskless anymore. The costs to insure sovereign bonds (CDS spreads) have risen to unknown levels in some European countries; meanwhile affecting CDS spreads for companies too.
Bieber David & Li Steven, 2012
Bachelor Thesis, Institute for Finance, School of Business FHNW
Keywords: Credit Default Swap, Sovereign risk, CDS pricing
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The aim of thesis is to determine the impact of sovereign risk on corporate CDS pricing. The four biggest economies of the Euro zone are taken into consideration: Spain, Italy, France and Germany. The countries ensure comparability yet still differ in their economic success. The analysed time period ranges over three years starting from 2009 until the end of 2011.
To start off, the reader is provided with a basic understanding of CDS and its features. Secondly, the paper proceeds with a literature review covering CDS pricing, sovereign risk, and its probable impact on corporate CDS price movements. With data obtained from the financial data provider Bloomberg, corporate and sovereign spreads are analyzed. Various statistical tests are carried out, of which a rolling correlation and regression calculation are to highlight the most.
The empirical results show approximately 30% - 60% in variation of corporate CDS spread can be explained by the variation of sovereign CDS. Moreover, the results show that CDS spreads of financial companies correlate to a larger degree with sovereign CDS spreads compared to non-financial companies. This indicates that sovereign risk can have a larger impact on the CDS pricing of financial companies compared to non?financial corporations.
Studiengang: Business Administration International Management (Bachelor)
Fachbereich der Arbeit: Accounting, Banking, Controlling and Finance