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The Credit Default Swap Market’s Determinants

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Author Info
Caitlin Ann Greatrex (Fordham University, Department of Economics)
Abstract

This paper explores the ability of variables suggested by structural models to explain variation in CDS spread changes. Using monthly changes in CDS spreads for 333 firms from January, 2001 – March, 2006, I find that these variables are able to explain thirty percent of the variation in CDS spread changes. A rating-based CDS index that accounts for both credit risk and 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 explain almost half of the explained variation in monthly CDS spread changes.

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Paper provided by Fordham University, Department of Economics in its series Fordham Economics Discussion Paper Series with number dp2008-05.

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Date of creation: 2008
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Handle: RePEc:frd:wpaper:dp2008-05

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Web page: http://www.fordham.edu/economics/
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Related research
Keywords: Credit default swap; credit risk; leverage; stock returns; equity volatility.;

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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References listed on IDEAS
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  1. Ericsson, Jan & Jacobs, Kris & Oviedo-Helfenberger, Rodolfo, 2004. "The Determinants of Credit Default Swap Premia," SIFR Research Report Series 32, Institute for Financial Research. [Downloadable!]
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  2. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May. [Downloadable!] (restricted)
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  3. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July. [Downloadable!] (restricted)
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