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Article
Publication date: 17 August 2015

Andrea Schertler and Saskia Stoerch

The purpose of this paper is to investigate whether factor sensitivities of margins of bank-issued warrants depend on issuers’ credit risk during the period of economic turmoil…

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Abstract

Purpose

The purpose of this paper is to investigate whether factor sensitivities of margins of bank-issued warrants depend on issuers’ credit risk during the period of economic turmoil between January 2008 and June 2010.

Design/methodology/approach

Therefore, first, Fama–MacBeth estimations were applied and it was demonstrate that the sensitivities of margins in terms of time to maturity and moneyness vary substantially over time; the average outcomes are similar to the results of classical pooled estimations.

Findings

Then, time-series tests were used and it was found that the steepness of the issuers’ credit default swap (CDS) spread curves correlates negatively with the time-to-maturity sensitivities as well as with the explanatory power of Fama–MacBeth estimations.

Research limitations/implications

These findings indicate that the life-cycle hypothesis is weakened when the issuers’ CDS spread curves become steeper.

Originality/value

Thus, this study offers a new approach to gain insights into the role of issuers’ credit risk on price setting behavior.

Details

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

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