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Common factors in credit defaults swaps markets

Listed author(s):
  • Yi-Hsuan Chen
  • Wolfgang Karl Härdle

We examine what are common factors that determine systematic credit risk and estimate and interpret the common risk factors. We also compare the contributions of common factors in explaining the changes of credit default swap (CDS) spreads during the pre-crisis, crisis and post-crisis period. Based on the testing result from the common principal components model, this study finds that the eigenstructures across the three subperiods are distinct and the determinants of risk factors differ from three subperiods. Furthermore, we analyze the predictive ability of dynamics in CDS indices changes by dynamic factor models.

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File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2012-063.pdf
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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2012-063.

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Length: 44 pages
Date of creation: Oct 2012
Handle: RePEc:hum:wpaper:sfb649dp2012-063
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