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Article
Publication date: 20 March 2017

Florian Kiesel and Jonathan Spohnholtz

The creditworthiness of corporates is most visible in credit ratings. This paper aims to present an alternative credit rating measure independently of credit rating agencies. The…

1571

Abstract

Purpose

The creditworthiness of corporates is most visible in credit ratings. This paper aims to present an alternative credit rating measure independently of credit rating agencies. The credit rating score (CRS) is based on the credit default swap (CDS) market trading.

Design/methodology/approach

A CRS is developed which is a linear function of logarithmized CDS spreads. This new CRS is the first one that is completely independent of the rating agency. The estimated ratings are compared with ratings provided by Fitch Ratings for 310 European and US non-financial corporates.

Findings

The empirical analysis shows that logarithmized CDS spreads and issuer credit ratings by agencies have a linear relationship. The new CRS provides market participants with an alternative risk assessment, which is solely based on market factors, and does not rely on credit rating analysts. The results indicate that our CRS is able to anticipate agency ratings in advance. Moreover, the analysis shows that the trading volume has only a limited influence in the anticipation of rating changes.

Originality/value

This study shows a new approach to measure the creditworthiness of firms by analyzing CDS spreads. This is highly relevant for regulation, firm monitoring and investors.

Details

The Journal of Risk Finance, vol. 18 no. 2
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 21 March 2016

Dennis Froneberg, Florian Kiesel and Dirk Schiereck

This study aims to investigate whether ownership compositions effect credit risk profiles of banks prior to and during the financial crisis. In detail, this study examines whether…

450

Abstract

Purpose

This study aims to investigate whether ownership compositions effect credit risk profiles of banks prior to and during the financial crisis. In detail, this study examines whether more powerful owners of a bank impact the credit risk profile.

Design/methodology/approach

The effects of the ownership structure on credit risk are estimated using credit default swap (CDS) spreads. Therefore, 86 global privately held and publicly listed banks from 23 countries are considered in a panel analysis for the period 2005-2008.

Findings

The results indicate that banks with a more concentrated ownership structure tend to be riskier, as they have larger CDS spreads. Furthermore, we observe that bank regulation has a negative impact on banks’ credit risk. Larger banks exhibit significantly lower risk than smaller banks.

Originality/value

These findings are of high relevance for the respective national regulative environment and for the respective financial institutions themselves. Regulatory bodies have to be aware of whether certain ownership compositions lead to a significant risk factor and which risk indicators exhibit the risk more precisely and in timely fashion.

Details

The Journal of Risk Finance, vol. 17 no. 2
Type: Research Article
ISSN: 1526-5943

Keywords

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Article
Publication date: 17 August 2015

Florian Kiesel, Felix Lücke and Dirk Schiereck

This study aims to analyze the impact and effectiveness of the regulation on the European sovereign Credit Default Swap (CDS) market. The European sovereign debt crisis has drawn…

813

Abstract

Purpose

This study aims to analyze the impact and effectiveness of the regulation on the European sovereign Credit Default Swap (CDS) market. The European sovereign debt crisis has drawn considerable attention to the CDS market. CDS have the ability of a speculative instrument to bet against a sovereign default. Therefore, the Regulation (EU) No. 236/2012 was introduced as the worldwide first uncovered CDS regulation. It prohibits buying uncovered sovereign CDS contracts in the European Union (EU).

Design/methodology/approach

First, this paper measures spread changes of sovereign CDS of the EU member states around regulation specific event dates to detect whether and when European sovereign CDS reacts to regulation announcements and the enforcement of regulation. Second, it compares the CDS long-term stability of the EU sample with a non-EU sample based on 44 non-EU sovereign CDS entities.

Findings

The results indicate widening CDS spreads prior to the regulation, and stable CDS spreads following the introduction of the regulation. In particular, sovereign CDS of European crisis-hit entities are stable since the regulation was introduced.

Originality/value

The results show that since the regulation of uncovered CDS in the EU has been enacted, the sovereign CDS market is stable and less volatile. Based on the theory about speculation on uncovered sovereign CDS by betting on the reference entity’s default, the introduction of Regulation (EU) No. 236/2012 appears to be an appropriate measure to stabilize markets and reduce speculation on sovereign defaults.

Details

The Journal of Risk Finance, vol. 16 no. 4
Type: Research Article
ISSN: 1526-5943

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