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Credit default swap spreads: market conditions, firm performance, and the impact of the 2007–2009 financial crisis

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  • Xiaoqing Fu

    (University of Macau)

  • Matthew C. Li

    (Royal Holloway University of London)

  • Philip Molyneux

    (University of Sharjah)

Abstract

We employ a multi-factor analysis from both a firm-specific (microeconomic) and market-specific (macroeconomic) perspective to examine the determinants of credit default swap (CDS) spreads in the USA, the UK and Japan between 2005 and 2012. We investigate both aggregate (cross-country) and individual market data so that a comparative analysis can be performed. Our results reveal that (i) in general, Tobin’s Q, stock market returns, and the risk-free interest rate possess significant explanatory power for CDS spreads; (ii) the relationship identified is found to exist in all three markets with varying strength; (iii) despite the added information flow, the 2007–2009 financial crisis did not shorten the persistence (adjustment speed) of CDS spreads to variations in our explanatory variables; and (iv) degree of firm leverage appears to have a significant influence on CDS spreads. These results are robust to various model specifications. Synthesizing our overall results, we maintain that to reap the benefits of using CDSs as a risk management tool, greater attention should be devoted to supporting a stable market (economic and financial) environment. This paper contributes to elucidate how firm performance and macroeconomic conditions play a significant role in explaining CDS spreads.

Suggested Citation

  • Xiaoqing Fu & Matthew C. Li & Philip Molyneux, 2021. "Credit default swap spreads: market conditions, firm performance, and the impact of the 2007–2009 financial crisis," Empirical Economics, Springer, vol. 60(5), pages 2203-2225, May.
    • Handle: RePEc:spr:empeco:v:60:y:2021:i:5:d:10.1007_s00181-020-01852-0
    DOI: 10.1007/s00181-020-01852-0
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    More about this item

    Keywords

    Credit default swap spread; Structural models; Firm performance; Macroeconomic conditions; Financial crisis;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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