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The Determinants of Credit Default Swap Premia

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  • Jan Ericsson
  • Kris Jacobs

    ()

  • Rodolfo A. Oviedo

Abstract

Using a new dataset of bid and offer quotes for credit default swaps, we investigate the relationship between theoretical determinants of default risk and actual market premia using linear regression. These theoretical determinants are firm leverage, volatility and the riskless interest rate. We find that estimated coefficients for these variables are consistent with theory and that the estimates are highly significant both statistically and economically. The explanatory power of the theoretical variables for levels of default swap premia is approximately 60%. The explanatory power for the differences in the premia is approximately 23%. Volatility and leverage by themselves also have substantial explanatory power for credit default swap premia. A principal component analysis of the residuals and the premia shows that there is only weak evidence for a residual common factor and also suggests that the theoretical variables explain a significant amount of the variation in the data. We therefore conclude that leverage, volatility and the riskfree rate are important determinants of credit default swap premia, as predicted by theory. En utilisant une nouvelle base de données de credit default swaps, nous étudions les relations entre les déterminants théoriques du risque de défaut et la prime actuelle du marché en utilisant la régression linéaire. Ces déterminants théoriques sont le niveau d’endettement de la firme, la volatilité et le taux d’intérêt sans risque. Nous trouvons que les coefficients estimés pour ces variables sont en accord avec la théorie et que les estimations sont fortement significatives aussi bien statistiquement qu’économiquement. Le pouvoir explicatif de ces variables théoriques sur le niveau de la prime du default swap est d’environ 60 %. Le pouvoir explicatif sur les différences de prime est de 23 %.La volatilité et le niveau d’endettement en eux-mêmes ont aussi un pouvoir explicatif substantiel pour la prime du credit default swap. Une analyse en composantes principales des résidus et de la prime montre qu’il n’y a pratiquement aucune trace d’un facteur commun résiduel et suggère également que les variables théoriques expliquent une part significative de la variance des données. Nous concluons donc que le niveau d’endettement, la volatilité et le taux sans risque sont d’importants déterminants de la prime des credit default swap, comme prédit par la théorie.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 2004s-55.

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Date of creation: 01 Nov 2004
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Handle: RePEc:cir:cirwor:2004s-55

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Keywords: credit default swap; credit risk; structural model; leverage; volatility; credit default swap; risque de crédit; modèle structurel niveau d’endettement; volatilité;

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