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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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    References listed on IDEAS

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    Cited by:

    1. Shih-Kang Chao & Wolfgang Karl Härdle & Hien Pham-Thu, 2014. "Credit Risk Calibration based on CDS Spreads," SFB 649 Discussion Papers SFB649DP2014-026, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    2. repec:eco:journ1:2017-02-91 is not listed on IDEAS
    3. 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.
    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. 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.
    6. Hertrich, Markus, 2015. "Does Credit Risk Impact Liquidity Risk? Evidence from Credit Default Swap Markets," MPRA Paper 67837, University Library of Munich, Germany.
    7. Kizys, Renatas & Paltalidis, Nikos & Vergos, Konstantinos, 2016. "The quest for banking stability in the euro area: The role of government interventions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 40(C), pages 111-133.
    8. Silva, Walmir & Kimura, Herbert & Sobreiro, Vinicius Amorim, 2017. "An analysis of the literature on systemic financial risk: A survey," Journal of Financial Stability, Elsevier, vol. 28(C), pages 91-114.
    9. repec:eee:ecmode:v:64:y:2017:i:c:p:48-59 is not listed on IDEAS

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