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Explaining aggregate credit default swap spreads

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  • Breitenfellner, Bastian
  • Wagner, Niklas

Abstract

We examine risk factors that explain daily changes in aggregate credit default swap (CDS) spreads before, during and after the 2007–2009 financial crisis. Based on the European iTraxx CDS index universe, we document time-variation in the significance of spread determinants. Before and after the crisis, spread changes are mainly determined by stock returns and implied stock market volatility. Global financial variables possess explanatory power during the pre-crisis and the crisis period. Liquidity proxy variables are significantly related to spread changes for financials, while unrelated for non-financials. Examination of the risk factors' explanatory power for large spread changes reveals weakened significance indicating that additional factors are necessary for their explanation. Finally, we examine the lead–lag relationship between spread changes and stock returns. Stock market returns lead spread changes during the crisis period, while a bidirectional relationship emerges after the crisis period. This suggests that aggregate spread changes are actually informative for equity market participants, possibly measuring systemic risk.

Suggested Citation

  • Breitenfellner, Bastian & Wagner, Niklas, 2012. "Explaining aggregate credit default swap spreads," International Review of Financial Analysis, Elsevier, vol. 22(C), pages 18-29.
    • Handle: RePEc:eee:finana:v:22:y:2012:i:c:p:18-29
    DOI: 10.1016/j.irfa.2012.02.002
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    2. Sorwar, Ghulam & Pappas, Vasileios & Pereira, John & Nurullah, Mohamed, 2016. "To debt or not to debt: Are Islamic banks less risky than conventional banks?," Journal of Economic Behavior & Organization, Elsevier, vol. 132(S), pages 113-126.
    3. Alena Audzeyeva & Xu Wang, 2023. "Fundamentals, real-time uncertainty and CDS index spreads," Review of Quantitative Finance and Accounting, Springer, vol. 61(1), pages 1-33, July.
    4. Julian S. Leppin & Stefan Reitz, 2016. "The Role of a Changing Market Environment for Credit Default Swap Pricing," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 21(3), pages 209-223, July.
    5. Hertrich, Markus, 2015. "Does Credit Risk Impact Liquidity Risk? Evidence from Credit Default Swap Markets," MPRA Paper 67837, University Library of Munich, Germany.
    6. Guesmi, Khaled & Dhaoui, Abderrazak & Goutte, Stéphane & Abid, Ilyes, 2018. "On the determinants of industry-CDS index spreads: Evidence from a nonlinear setting," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 56(C), pages 233-254.
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    8. Dodd, Olga & Kalimipalli, Madhu & Chan, Wing, 2021. "Evaluating corporate credit risks in emerging markets," International Review of Financial Analysis, Elsevier, vol. 73(C).
    9. Gatfaoui, Hayette, 2017. "Equity market information and credit risk signaling: A quantile cointegrating regression approach," Economic Modelling, Elsevier, vol. 64(C), pages 48-59.
    10. Shi, Yukun & Stasinakis, Charalampos & Xu, Yaofei & Yan, Cheng, 2022. "Market co-movement between credit default swap curves and option volatility surfaces," International Review of Financial Analysis, Elsevier, vol. 82(C).
    11. Khaldoun Maddallah Al-Qaisi & Rafat Mohd Soudki Al-Batayneh, 2017. "Credit Default Swap and Liquidity," International Journal of Economics and Financial Issues, Econjournals, vol. 7(2), pages 697-700.
    12. Österholm, Pär, 2018. "The relation between treasury yields and corporate bond yield spreads in Australia: Evidence from VARs," Finance Research Letters, Elsevier, vol. 24(C), pages 186-192.
    13. Batten, Jonathan A. & Jacoby, Gady & Liao, Rose C., 2014. "Corporate yield spreads and real interest rates," International Review of Financial Analysis, Elsevier, vol. 34(C), pages 89-100.
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    15. Pereira, John & Sorwar, Ghulam & Nurullah, Mohamed, 2018. "What drives corporate CDS spreads? A comparison across US, UK and EU firms," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 56(C), pages 188-200.

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