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A Peer-reviewed scientific articles/A1 Journal article (refereed), original research
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Do Banks' Overnight Borrowing Rates Lead Their CDS Price? Evidence from the Eurosystem, Journal of Financial Intermediation July (2017). Tölö, Eero; Jokivuolle, Esa; Virén, Matti

Category A Peer-reviewed scientific articles
Sub-category A1 Journal article (refereed), original research
auki Internal authors
Tölö Eero / Macroprudential Analysis Division
All authors as text Tölö, Eero; Jokivuolle, Esa; Virén, Matti 
Number of authors
Status Published
Year of publication 2017 
Date 25.05.2017 
Name of article Do Banks' Overnight Borrowing Rates Lead Their CDS Price? Evidence from the Eurosystem 
Name of journal Journal of Financial Intermediation
Volume of issue 31 
Number of issue July 
Pages 93-106 
Abstract We construct a measure of a bank's relative creditworthiness from the Eurosystem's proprietary inter-bank loan data: average overnight borrowing rate relative to an overnight rate index (AOR). We then investigate the dynamic relationship between AOR and the credit default swap price relative to the corresponding market index of 60 banks during 2008–2013. Price discovery mainly takes place in the CDS market, but AOR also contributes to it. The lagged daily changes of AOR help predict CDS. This indicates that AOR includes private information, which the CDS market does not immediately incorporate. We further show that the private information advantage is concentrated on days of market stress and on banks, which mainly borrow from relationship lender banks. Such borrower banks are typically smaller, have weaker ratings, and are likely to reside in crisis countries. Competent authorities can use AOR as a complementary indicator of banks’ concurrent health.
Free text descriptor in Finnish eurojärjestelmä; CDS; TARGET2; rahamarkkinat; korot; indikaattorit; pankit; 
Free text descriptor in English Private information; Money markets; Overnight borrowing rates; Credit default swaps (CDS); Lead-lag relationship; TARGET2; Eurosystem; Early-warning indicators 
JEL-codes G01; G14; G21 
ISSN / e-ISSN 1042-9573 
auki Internet addresses
Additional information Available online 25 May 2017.
Open Access Not open