Utilizing News Topics for Credit Risk Management: The Explanation of Bank CDS Spreads. (18th August 2020) - Roeder, Jan
ABSTRACT: Monitoring the default risk of banks is highly relevant for companies when they enter into derivative contracts with banks to hedge risks. These contracts are subject to the counterparty risk of the bank defaulting. In credit risk management, market-based measures such as credit default swap (CDS) spreads are used to continuously assess the credit risk of counterparties. At the same time, CDS spreads are difficult to interpret and explain. We investigate which financial news topics are positively or negatively related to bank CDS spreads. Our findings indicate that especially negative news topics are significantly associated with changes in CDS spreads. These include not only financial aspects such as a decrease in dividends or revenue guidance but also non-financial topics such as sanctions and legal issues. Thereby, our understanding of which topics addressed in financial news are relevant for supporting decision-making in the context of credit risk management is improved.