The price discovery process of the sovereign and bank credit risk in a high-volatility framework

This research study presents three distinct and separate (but logically linked) essays focused on the price discovery process of credit risk. The aim of the first essay (working paper n. 1) is to analyse the long lasting dynamic relationship between the credit default swap (CDS) premia and the government bond spreads (GBS), by focusing particularly on the sovereign credit risk, in order to evaluate the lead-lag markets in the price discovery process against the backdrop of a deep crisis. The focus of this study concerns the case of Italy, one of the major countries subject to international speculative attacks by market operators because of the weak GDP growth, the high public debt and the political fragility, for the period 2007-2017. In the second essay (working paper n. 2) the analysis is extended to the lead-lag relationship between the PIIGS - excp Greece 10-year CDS premia and the respective government bond spreads (GBS) series by employing daily data, from January 2007 to October 2017, provided by Bloomberg. The time interval has been considered as whole in the first part of the analysis, without distinguishing the different stages of development of the recent crisis, while in the second part I focused on the sovereign debt crisis impact on the lead-lag relationship. In the third essay (working paper n. 3) It has been evaluated, as a preliminary stage of the investigation, the lead-lag relationship between the Italian sovereign 5Y CDS premia and the Italian banks proxy 5Y CDS premia series by employing daily data, for the interval Q2 2007- Q3 2018 (provided by Bloomberg). The latter series was built up by using the Intesa San Paolo 5y CDS contracts and the Unicredit 5y CDS contracts series weighted by the respective market capitalization. In the second part of the study, I extended the determinants inspired by the classic Merton (1974 ) model in order to investigate on the drivers of Italian bank credit risk during the most volatile phases of this decade: the financial crisis (August 2007- October 2009 ), the sovereign debt crisis (October 2009 - July 2012 ) and the anti-establishment Government/pre-Italy’s budget update (March 2018 - September 2018 ) period.