The Dynamics of Short- and Long-Term CDS-spreads of Banks

This paper studies ’Stylised Facts’ and ’Determinants’ of short-and long-termCDS-spreads of banks. As short-term spreads we choose 6M-, as long-termspreads we choose 5Y-spreads. In the section ’Stylised Facts’ we found thatthe correlation between short- and long-term spreads for the total period ishigh (97%). However, the correlation in sub-periods varies across all possiblecorrelations. Particularly, spreads can have negative correlation. In contrastto [Covitz and Downing, 2007], we find high positive (Covitz/Downing: highnegative) correlation for turbulent market circumstances. In the section ’Deteminants’we confirm the Merton-factors (stock price, stock price volatility, interestrate level) for the 5Y-segment, but not for the 6M-segment. Furthermore, we donot find any empirical support that short-term spreads are particularly sensitiveto illiquidity factors. In that sense, we also contrast [Covitz and Downing, 2007].