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Common factors in credit defaults swaps markets

Author

Listed:
  • Yi-Hsuan Chen
  • Wolfgang Karl Härdle

Abstract

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.

Suggested Citation

  • Yi-Hsuan Chen & Wolfgang Karl Härdle, 2012. "Common factors in credit defaults swaps markets," SFB 649 Discussion Papers SFB649DP2012-063, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  • Handle: RePEc:hum:wpaper:sfb649dp2012-063
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    More about this item

    Keywords

    credit default swaps; common factors; credit risk;
    All these keywords.

    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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