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Credit Spreads And Bankruptcy Information From Options Data

Author

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  • CHI-FENG TZENG

    (Department of Quantitative Finance, National Tsing Hua University, 101, Section 2 Kuang Fu Road, Hsinchu, Taiwan 30013, Taiwan)

Abstract

The changes in implied bankruptcy chances are applied to explain the credit default swap (CDS) spread changes of six financial institutions during the financial crisis. I estimated the chances from options data, with the assumption that risk neutral density (RND) is composed of lognormal densities with a chance of bankruptcy. Interest rate information and market information from firm- and index-level RNDs are used to explain CDS spread changes. The empirical findings show that firm-level information provides more explanations compared with index-level information. The changes in firm-level return is a critical determinant of CDS spreads. The changes in implied bankruptcy chances are significantly and positively related to spread changes. Finally, the changes in slope term is negatively related to spread changes.

Suggested Citation

  • Chi-Feng Tzeng, 2014. "Credit Spreads And Bankruptcy Information From Options Data," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 1-22.
    • Handle: RePEc:wsi:afexxx:v:09:y:2014:i:02:n:s2010495214400089
    DOI: 10.1142/S2010495214400089
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    References listed on IDEAS

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    1. Antje Berndt & Rohan Douglas & Darrell Duffie & Mark Ferguson, "undated". "Measuring Default Risk Premia from Default Swap Rates and EDFs," GSIA Working Papers 2006-E31, Carnegie Mellon University, Tepper School of Business.
    2. Antonio Di Cesare & Giovanni Guazzarotti, 2010. "An analysis of the determinants of credit default swap spread changes before and during the subprime financial turmoil," Temi di discussione (Economic working papers) 749, Bank of Italy, Economic Research and International Relations Area.
    3. Burkhard Raunig & Martin Scheicher, 2009. "Are Banks Different? Evidence from the CDS Market," Working Papers 152, Oesterreichische Nationalbank (Austrian Central Bank).
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    Cited by:

    1. Chia-Lin Chang & Shing-Yang Hu & Shih-Ti Yu, 2014. "Recent Developments In Quantitative Finance: An Overview," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 1-7.

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    More about this item

    Keywords

    CDS spreads; bankruptcy probability; risk-neutral density; financial crisis; financial institutions; G01; G10; G11;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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