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The Credit Default Swap Market's Determinants

Author

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  • 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

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    File URL: http://ftp.web.fordham.edu/ECONOMICS_RESEARCH/PAPERS/dp2008_05_greatrex.pdf
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    References listed on IDEAS

    as
    1. 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(01), pages 109-132, February.
    2. 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.
    3. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    4. repec:wsi:ijtafx:v:09:y:2006:i:01:n:s0219024906003445 is not listed on IDEAS
    5. S. Illeris & G. Akehurst, 2002. "Introduction," The Service Industries Journal, Taylor & Francis Journals, vol. 22(1), pages 1-3, January.
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    Cited by:

    1. 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.

    More about this item

    Keywords

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

    JEL classification:

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

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