City Research Online

The Housing Market and the Credit Default Swap premium in the UK Banking Sector: A VAR Approach

Benbouzid, N., Mallick, S. and Pilbeam, K. (2017). The Housing Market and the Credit Default Swap premium in the UK Banking Sector: A VAR Approach. Research in International Business and Finance, doi: 10.1016/j.ribaf.2017.01.009

Abstract

In the wake of the recent global financial crisis, this paper investigates the determinants of the Credit Default Swap premium in the UK banking sector for the period January 2004-April 2011. Employing a VAR model, we focus on the roles played by house prices, the yield spread, the UK TED spread and the FTSE 100 index. Our main results suggest that the CDS premium significantly increases in the medium term following a positive shock to the house price index, reflecting that continued house price appreciation can hide the likelihood of default risk, as shown in the insignificant response in the short run. We also find that a positive shock to the CDS premium significantly reduces house prices because it induces banks and other financial institutions to lend less, reducing the demand for housing and exerting further downward pressure on house prices. While a positive shock to stock prices lowers CDS premium, a positive shock to the liquidity premium increases CDS premium. Finally, our variance decomposition analysis shows that the house price shock explains over 19% of the long-run forecast-error variance of the CDS premium, while shocks in other variables each explain less than 8% of this forecast-error variance.

Publication Type: Article
Publisher Keywords: CDS premium; House prices; UK banking sector; Credit risk; Financial crisis
Subjects: H Social Sciences > HB Economic Theory
Departments: School of Arts & Social Sciences > Economics
URI: http://openaccess.city.ac.uk/id/eprint/16858
[img]
Preview
Text - Accepted Version
Available under License Creative Commons Attribution Non-commercial No Derivatives.

Download (985kB) | Preview

Export

Downloads

Downloads per month over past year

View more statistics

Actions (login required)

Admin Login Admin Login