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An analysis of the determinants of credit default swap spread changes before and during the subprime financial turmoil

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Author Info

  • Antonio Di Cesare

    ()
    (Bank of Italy)

  • Giovanni Guazzarotti

    ()
    (Bank of Italy)

Abstract

This paper analyzes the determinants of credit default swap spread changes for a large sample of US non-financial companies over the period between January 2002 and March 2009. In our analysis we use variables that the literature has found have an impact on CDS spreads and, in order to account for possible non-linear effects, the theoretical CDS spreads predicted by the Merton model. We show that our set of variables is able to explain more than 50% of CDS spread variations both before and after July 2007, when the current financial turmoil began. We also document that since the onset of the crisis CDS spreads have become much more sensitive to the level of leverage while volatility has lost its importance. Using a principal component analysis we also show that since the beginning of the crisis CDS spread changes have been increasingly driven by a common factor, which cannot be explained by indicators of economic activity, uncertainty, and risk aversion.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 749.

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Date of creation: Mar 2010
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Handle: RePEc:bdi:wptemi:td_749_10

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Web page: http://www.bancaditalia.it
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Related research

Keywords: credit default swaps; bond spreads; credit risk; Merton model;

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Cited by:
  1. Di Addario, Sabrina & Vuri, Daniela, 2010. "Entrepreneurship and market size. The case of young college graduates in Italy," Labour Economics, Elsevier, vol. 17(5), pages 848-858, October.
  2. Alessandro Carboni, 2011. "The sovereign credit default swap market: price discovery, volumes and links with banks' risk premia," Temi di discussione (Economic working papers) 821, Bank of Italy, Economic Research and International Relations Area.

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