Using information in US and European bank and sovereign CDS spreads we study the systematic component of banks' credit risk that stems from banks' common exposure to sovereign default risk. Based on a default intensity model, we find that sovereign default risk is a significant factor of bank...

Firm cyclicality decreases by around 40% after the inception of credit default swap (CDS) trading. The effect is due to CDS firms’ lower asset growth-GDP growth sensitivity in good times and stronger for firms facing a more severe exacting creditor problem. The cyclicality-reducing effect of...