IDEAS home Printed from https://ideas.repec.org/p/frd/wpaper/dp2008-05.html
   My bibliography  Save this paper

The Credit Default Swap Market's Determinants

Author

Listed:
  • Caitlin Ann Greatrex

    (Fordham University, Department of Economics)

Abstract

This 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 – 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.

Suggested Citation

  • Caitlin Ann Greatrex, 2008. "The Credit Default Swap Market's Determinants," Fordham Economics Discussion Paper Series dp2008-05, Fordham University, Department of Economics.
    • Handle: RePEc:frd:wpaper:dp2008-05
    as

    Download full text from publisher

    File URL: https://archive.fordham.edu/ECONOMICS_RESEARCH/PAPERS/dp2008_05_greatrex.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Didier Cossin & Tomas Hricko & Daniel Aunon-Nerin & Zhijiang Huang, 2002. "Exploring for the Determinants of Credit Risk in Credit Default Swap Transaction Data: Is Fixed-Income Markets’ Information Suffcient to Evaluate Credit Risk?," FAME Research Paper Series rp65, International Center for Financial Asset Management and Engineering.
    2. Ericsson, Jan & Jacobs, Kris & Oviedo, Rodolfo, 2009. "The Determinants of Credit Default Swap Premia," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(1), pages 109-132, February.
    3. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    4. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    5. Fathi Abid & Nader Naifar, 2006. "The Determinants Of Credit Default Swap Rates: An Explanatory Study," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 9(01), pages 23-42.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Brasel, Kelsey R. & Hill, Mary S. & Taylor, Gary K., 2022. "The relevance of GAAP vs. non-GAAP net assets to creditors: An examination of the credit default swap market," Advances in accounting, Elsevier, vol. 56(C).
    2. Choi, Sun-Yong, 2022. "Credit risk interdependence in global financial markets: Evidence from three regions using multiple and partial wavelet approaches," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 80(C).
    3. Jatin Malhotra & Angelo Corelli, 2018. "The Determinants of CDS Spreads in Multiple Industry Sectors: A Comparison between the US and Europe," Risks, MDPI, vol. 6(3), pages 1-16, August.
    4. Wisniewski, Tomasz Piotr & Lambe, Brendan John, 2015. "Does economic policy uncertainty drive CDS spreads?," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 447-458.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Xiaoqing Fu & Matthew C. Li & Philip Molyneux, 2021. "Credit default swap spreads: market conditions, firm performance, and the impact of the 2007–2009 financial crisis," Empirical Economics, Springer, vol. 60(5), pages 2203-2225, May.
    3. Jiri Podpiera & Ms. Inci Ötker, 2010. "The Fundamental Determinants of Credit Default Risk for European Large Complex Financial Institutions," IMF Working Papers 2010/153, International Monetary Fund.
    4. Caitlin Ann Greatrex, 2008. "The Credit Default Swap Market's Reaction to Earnings Announcements," Fordham Economics Discussion Paper Series dp2008-06, Fordham University, Department of Economics.
    5. Bernardo León & Andrés Mora, 2011. "CDS: relación con índices accionarios y medida de riesgo," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 29(64), pages 178-211, July.
    6. Qing Bai & Lu Zhu, 2018. "The Effects of Industry Specific and Local Economic Factors on Credit Default Swap Spreads: Evidence from REITs," Journal of Financial Services Research, Springer;Western Finance Association, vol. 54(3), pages 293-321, December.
    7. Lamia Bekkour & Thorsten Lehnert & Maria Chiara Amadori, 2011. "The Relative Informational Efficiency of Stocks, Options and Credit Default Swaps," LSF Research Working Paper Series 11-13, Luxembourg School of Finance, University of Luxembourg.
    8. Rong Huang & Xintian Lin & Yuan Xie, 2023. "Does CDS market price intangible asset value? Evidence from SG&A expenditure," Review of Quantitative Finance and Accounting, Springer, vol. 61(2), pages 701-728, August.
    9. Sorin Gabriel Anton, 2011. "The Local Determinants Of Emerging Market Sovereign Cds Spreads In The Context Of The Debt Crisis. An Explanatory Study "," Analele Stiintifice ale Universitatii "Alexandru Ioan Cuza" din Iasi - Stiinte Economice (1954-2015), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 58, pages 41-52, november.
    10. Mary S. Hill & Gary K. Taylor, 2023. "Default risk and earnings expectations: The role of contract maturity in the credit default swap market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(4), pages 4275-4298, December.
    11. Brasel, Kelsey R. & Hill, Mary S. & Taylor, Gary K., 2022. "The relevance of GAAP vs. non-GAAP net assets to creditors: An examination of the credit default swap market," Advances in accounting, Elsevier, vol. 56(C).
    12. Carol Alexander & Andreas Kaeck, 2006. "Regimes in CDS Spreads: A Markov Switching Model of iTraxx Europe Indices," ICMA Centre Discussion Papers in Finance icma-dp2006-08, Henley Business School, University of Reading.
    13. Benbouzid, Nadia & Mallick, Sushanta K. & Sousa, Ricardo M., 2017. "An international forensic perspective of the determinants of bank CDS spreads," Journal of Financial Stability, Elsevier, vol. 33(C), pages 60-70.
    14. Antonio Trujillo-Ponce & Reyes Samaniego-Medina & Clara Cardone-Riportella, 2014. "Examining what best explains corporate credit risk: accounting-based versus market-based models," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 15(2), pages 253-276, April.
    15. Das, Sanjiv R. & Hanouna, Paul & Sarin, Atulya, 2009. "Accounting-based versus market-based cross-sectional models of CDS spreads," Journal of Banking & Finance, Elsevier, vol. 33(4), pages 719-730, April.
    16. Alexander, Carol & Kaeck, Andreas, 2008. "Regime dependent determinants of credit default swap spreads," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 1008-1021, June.
    17. Hertrich, Markus, 2015. "Does Credit Risk Impact Liquidity Risk? Evidence from Credit Default Swap Markets," MPRA Paper 67837, University Library of Munich, Germany.
    18. Giammarino, Flavia & Barrieu, Pauline, 2009. "A semiparametric model for the systematic factors of portfolio credit risk premia," Journal of Empirical Finance, Elsevier, vol. 16(4), pages 655-670, September.
    19. Nan Hu & Ling Liu & Lu Zhu, 2018. "Credit default swap spreads and annual report readability," Review of Quantitative Finance and Accounting, Springer, vol. 50(2), pages 591-621, February.
    20. Giacomo Bulfone & Roberto Casarin & Francesco Ravazzolo, 2021. "Corporate CDS spreads from the Eurozone crisis to COVID-19 pandemic: A Bayesian Markov switching model," Working Paper series 21-09, Rimini Centre for Economic Analysis.

    More about this item

    Keywords

    Credit default swap; credit risk; leverage; stock returns; equity volatility.;
    All these keywords.

    JEL classification:

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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:frd:wpaper:dp2008-05. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Fordham Economics (email available below). General contact details of provider: https://edirc.repec.org/data/edforus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.