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Title:Analyzing default risk and liquidity demand during a financial crisis: The case of Canada PDF Logo
Authors:Allen, Jason
Horta├žsu, Ali
Kastl, Jakub
Issue Date:2011
Series/Report no.:Bank of Canada Working Paper 2011,17
Abstract:This paper explores the reliability of using prices of credit default swap contracts (CDS) as indicators of default probabilities during the 2007/2008 financial crisis. We use data from the Canadian financial system to show that these publicly available risk measures, while indicative of initial problems of the financial system as a whole, do not seem to correspond to risks implied by the cross-sectional heterogeneity in bank behavior in short-term lending markets. Strategies in, and reliance on the payments system as well as special liquidity-supplying tools provided by the central bank seem to be more important additional indicators of distress of individual banks, or lack thereof than the CDSs. It therefore seems that central banks should utilize high-frequency data on liquidity demand to obtain a better picture of financial health of individual participants of the financial system.
Subjects:Financial Institutions
Financial markets
Payment
clearing
and settlement systems
JEL:G01
G28
E42
E58
Document Type:Working Paper
Appears in Collections:Bank of Canada Working Papers

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