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The determinants of CDS spreads

Author

Listed:
  • Galil, Koresh
  • Shapir, Offer Moshe
  • Amiram, Dan
  • Ben-Zion, Uri

Abstract

This study proposes models that can be used as shorthand analysis tools for CDS spreads and CDS spread changes. For this purpose, we examine the determinants of CDS spreads and spread changes on a broad database of 718 US firms during the period from early 2002 to early 2013. Contrary to previous studies, we find that market variables have explanatory power after controlling for firm-specific variables inspired by structural models. Three explanatory variables appear to outperform the other variables examined in this paper: Stock Return, the change in stock return volatility, and the change in the median CDS spread in the rating class. We also find that models used in the event study literature to explain spread changes can be improved by adding market variables. Furthermore, we show that ratings explain cross-sectional variation in CDS spreads even after controlling for structural model variables.

Suggested Citation

  • Galil, Koresh & Shapir, Offer Moshe & Amiram, Dan & Ben-Zion, Uri, 2014. "The determinants of CDS spreads," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 271-282.
    • Handle: RePEc:eee:jbfina:v:41:y:2014:i:c:p:271-282
    DOI: 10.1016/j.jbankfin.2013.12.005
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    More about this item

    Keywords

    Credit Default Swap; CDS; Credit spread; Corporate bond; Structural model;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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