The Credit Default Swap Market's Determinants
AbstractThis 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 â€“ 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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Bibliographic InfoPaper provided by Fordham University, Department of Economics in its series Fordham Economics Discussion Paper Series with number dp2008-05.
Date of creation: 2008
Date of revision:
Credit default swap; credit risk; leverage; stock returns; equity volatility.;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-03-08 (All new papers)
- NEP-FMK-2008-03-08 (Financial Markets)
- NEP-RMG-2008-03-08 (Risk Management)
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