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Detecting abnormal changes in credit default swap spreads using matching-portfolio models

Author

Listed:
  • Fabio Bertoni

    (EM - EMLyon Business School)

  • Stefano Lugo

    (Universiteit Utrecht / Utrecht University [Utrecht])

Abstract

We evaluate the size and power of different statistical tests and adjustment methods for matching-portfolio models to detect abnormal changes in credit default swap (CDS) spreads. The sign-test generally dominates the signed-rank test in terms of size, and dominates both the t-test and the signed-rank test in terms of power. Traditional adjustment methods often lead to a misspecified sign-test. We propose a new and parsimonious method (the spread-matched method), which leads to a well-specified and more powerful sign-test. The superiority of the spread-matched method is particularly evident for observations characterized by extreme levels of CDS spread. Analyses of CDS samples differing by contract maturity, data source, and time period confirm these results. We perform an event study on rating downgrades to illustrate how the choice of tests and adjustment methods can affect inference.

Suggested Citation

  • Fabio Bertoni & Stefano Lugo, 2018. "Detecting abnormal changes in credit default swap spreads using matching-portfolio models," Post-Print hal-02312138, HAL.
    • Handle: RePEc:hal:journl:hal-02312138
    DOI: 10.1016/j.jbankfin.2018.03.009
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    Cited by:

    1. Viswanathan Nagarajan & Prateek Sharma, 2021. "Firm internationalization and long‐term impact of the Covid‐19 pandemic," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(6), pages 1477-1491, September.
    2. Andres, Christian & Betzer, André & Doumet, Markus, 2021. "Measuring changes in credit risk: The case of CDS event studies," Global Finance Journal, Elsevier, vol. 49(C).
    3. Hübel, Benjamin, 2022. "Do markets value ESG risks in sovereign credit curves?," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 134-148.
    4. Deng, Kaihua & Qiao, Guannan, 2022. "Triple A default," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).

    More about this item

    Keywords

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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