Article2008

Credit Default Swap Market Determinants

53 citations0/0 files storedThe Journal of Fixed Income

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Credit Risk and Financial Regulations Stochastic processes and financial applications Financial Distress and Bankruptcy Prediction

Abstract

This article explores the ability of variables suggested by structural models to explain variation in credit default swap (CDS) spread changes. Using monthly changes in CDS spreads for 333 firms from January 2001–March 2006, Greatrex finds that these variables are able to explain 35% of the variation in CDS spread changes. A rating-based CDS index that accounts for overall market conditions is the single best predictor of CDS spread changes. Leverage and volatility, however, are also key determinants, as these two variables can account for approximately half of the explained variation in monthly CDS spread changes. TOPICS:Credit default swaps, information providers/credit ratings, statistical methods, volatility measures

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References

1974ON THE PRICING OF CORPORATE DEBT: THE RISK STRUCTURE OF INTEREST RATES*1974On the Pricing of Corporate Debt: The Risk Structure of Interest Rates 2001The Determinants of Credit Spread Changes 2004Capital Structure and Stock Returns 2005An Empirical Analysis of the Dynamic Relation between Investment‐Grade Bonds and Credit Default Swaps 2004The relationship between credit default swap spreads, bond yields, and credit rating announcements 2009The Determinants of Credit Default Swap Premia 2006An Empirical Analysis of the Dynamic Relation between Investment-Grade Bonds and Credit Default Swaps

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