This paper studies how the Greek sovereign credit event in March 2012 impacted the credit default swap (CDS) market from market-wide and investor behaviour perspectives, using both network tools to a dataset of snapshots of the global bilateral CDS exposures and a panel analysis on CDS spreads. Regarding the CDS spreads, we find very little discernible direct impact of the Greek credit event on CDS spreads overall. This finding provides some further evidence that the Greek credit event was well anticipated by most market participants. However, we find several significant changes in the Greek CDS network structure following the credit event: the number of connections via exposures declined significantly, the directionality of the positions (net long vs net short) of the main groups of market participants reversed, while none of the non-banks returned to trade Greek CDSs until the last observation of dataset (October 2014). Regarding indirect effects to other CDS markets, we find evidence of temporary spill-over effects on CDS reference entities with credit risk associated with the risk of the Greek sovereign. In particular, the market and counterparty structures changed temporarily with all types of traders decreasing their exposures to the EU periphery sovereign reference entities and also changing their trading counterparties, while after some time, the structure of the market returned to a similar one observed before the credit event. Finally, we find some support for the bank-sovereign nexus, as there was a consistent retreat from the CDS exposures on banks in the EU periphery countries, contrary to banks residing in the other EU countries.

Building on the literature on systemic risk and financial contagion, the paper introduces estimated network linkages into an early-warning model to predict bank distress among European banks. We use multivariate extreme value theory to estimate equity-based tail-dependence networks, whose links proxy for the markets’ view of bank interconnectedness in case of elevated financial stress. The paper finds that early warning models including estimated tail dependencies consistently outperform bank-specific benchmark models without networks. The results are robust to variation in model specification and also hold in relation to simpler benchmarks of contagion. Generally, this paper gives direct support for measures of interconnectedness in early-warning models, and moves toward a unified representation of cyclical and cross-sectional dimensions of systemic risk.

This paper presents a reduced form credit risk model to study CMBS pricing and CMBS market efficiency during and after the credit crisis with a comprehensive loan, bond and deal level data set. Using a model determined fair value, an automated trading strategy based on a newly determined risk ratio buys undervalued and sells overvalued CMBS. These strategies result in substantial trading profits between November 2007 and June 2015. Controlling for CMBS sector risk factors, we reject CMBS market efficiency over the entire sample period. When we split the sample into the Crisis and Recovery periods, we observe persistent abnormal returns over both subperiods, which is consistent with an inefficient CMBS market. Because the CMBS market appears to be inefficient, our results suggest that the approach presented in this paper may facilitate the increased financial stability of the CRE sector through the better pricing and risk management of CMBS.

Most discussions of the Greek debt overhang have focussed on the implications for Greece. We show that when additional funds released to the debtor (Greece), via debt restructuring, are used efficiently in pursuit of a practicable business plan, then both debtor and creditor can benefit. We examine a dynamic two country model calibrated to Greek and German economies and support two-steady states, one with endogenous default and one without, depending on creditors’ expectations. In the default steady state, debt forgiveness lowers the volatility of both German and Greek consumption whereas demanding higher recovery rates has the opposite effect. In a second order approximation of the model, conditional welfare analysis shows that a policy of immediate leniency followed by harsher terms as the economy grows is beneficial to both creditors and debtors.

Previous work suggests that the charter value hypothesis is theoretically grounded and empirically supported, but not universally. Accordingly, this paper aims to perform an analysis of the relations between charter value, risk taking, and supervision, taking into account the relations’ complexity. Specifically, using the CAMELS rating system as a general framework for supervision, we study how charter value relates to risk and supervision by means of classification and regression tree analysis. The sample covers the period 2005–2016 and consists of listed banks in countries that were members of the Eurozone when it came into existence, along with Greece. To evaluate the crisis consequences, we also separately analyze four subperiods and countries that required financial aid from third parties and those that did not so, along with large and small banks. Our results reflect the complexity of the relations between charter value, supervision, and risk. Indeed, supervision and charter value seem aligned regarding only some types of risk.