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Firm and Guarantor Risk, Risk Contagion, and the Interfirm Spread among Insured Deposits

Published online by Cambridge University Press:  06 April 2009

Douglas O. Cook  and
Lewis J. Spellman
Douglas O. Cook
Affiliation:
School of Business Administration, University of Mississippi, Oxford, MS 38677
Lewis J. Spellman
Affiliation:
College of Business Administration, University of Texas at Austin, Austin, TX 78712-1179.
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Abstract

We develop a model of third party guaranteed debt and show that interest rate premiums are multiplicatively related to firm and guarantor risk. We apply the model to thrifts issuing CDs guaranteed by the FSLIC and then estimate firm probabilities of insolvency and guarantor risk across 20 observed months. This time period spans the insolvency of the guarantor followed by two recapitalizations. The relative stability in firm risk across time offers no evidence of generalized risk contagion among firms. We attribute elevated CD premiums and rate spreads to increases in guarantor risk rather than changes in firm risk.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 31 , Issue 2 , June 1996 , pp. 265 - 281
Copyright
Copyright © School of Business Administration, University of Washington 1996

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