Credit Derivatives and Loan Pricing

L. Norden, W.B. Wagner

Research output: Working paperDiscussion paperOther research output

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Abstract

This paper examines the relationship between the new markets for credit default swaps (CDS) and the pricing of syndicated loans to U.S. corporates. We find that changes in CDS spreads have a significantly positive coefficient and explain about 25% of subsequent monthly changes in aggregate loan spreads during 2000-2005. Moreover, when compared to traditional loan pricing factors, they turn out to be the dominant determinant of loan spreads. In particular, they explain loan rates much better than same rated bonds. This suggests that, even though CDS and bond markets may equally price market credit risk, a substantial part of CDS prices additionally contains loan-specific information. We also find that, over time, new information from CDS markets is incorporated into loans faster, but information from other markets is not. We argue that this indicates that the markets for CDS influence banks’ loan pricing behavior and thus have an impact on actual financing decisions in the economy.
Original languageEnglish
Place of PublicationTilburg
PublisherTILEC
Number of pages37
Volume2007-015
Publication statusPublished - 2007

Publication series

NameTILEC Discussion Paper
Volume2007-015

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Credit derivatives
Loan pricing
Credit default swaps
Derivative pricing
Loans
Coefficients
Financing decisions
Loan rates
Bank loans
New markets
Credit default swap (CDS) spreads
Syndicated loans
Factors
Market price
Pricing behaviour
Pricing
Bond market
Credit risk

Keywords

  • Syndicated Lending
  • Loan Rates
  • Credit Derivatives
  • Credit Markets
  • Credit Spreads

Cite this

Norden, L., & Wagner, W. B. (2007). Credit Derivatives and Loan Pricing. (TILEC Discussion Paper; Vol. 2007-015). Tilburg: TILEC.
Norden, L. ; Wagner, W.B. / Credit Derivatives and Loan Pricing. Tilburg : TILEC, 2007. (TILEC Discussion Paper).
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Norden, L & Wagner, WB 2007 'Credit Derivatives and Loan Pricing' TILEC Discussion Paper, vol. 2007-015, TILEC, Tilburg.

Credit Derivatives and Loan Pricing. / Norden, L.; Wagner, W.B.

Tilburg : TILEC, 2007. (TILEC Discussion Paper; Vol. 2007-015).

Research output: Working paperDiscussion paperOther research output

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AB - This paper examines the relationship between the new markets for credit default swaps (CDS) and the pricing of syndicated loans to U.S. corporates. We find that changes in CDS spreads have a significantly positive coefficient and explain about 25% of subsequent monthly changes in aggregate loan spreads during 2000-2005. Moreover, when compared to traditional loan pricing factors, they turn out to be the dominant determinant of loan spreads. In particular, they explain loan rates much better than same rated bonds. This suggests that, even though CDS and bond markets may equally price market credit risk, a substantial part of CDS prices additionally contains loan-specific information. We also find that, over time, new information from CDS markets is incorporated into loans faster, but information from other markets is not. We argue that this indicates that the markets for CDS influence banks’ loan pricing behavior and thus have an impact on actual financing decisions in the economy.

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Norden L, Wagner WB. Credit Derivatives and Loan Pricing. Tilburg: TILEC. 2007. (TILEC Discussion Paper).