The determinants of CDS spreads

Koresh Galil, Offer Moshe Shapir, Dan Amiram, Uri Ben-Zion

Research output: Contribution to journalArticlepeer-review

79 Scopus citations

Abstract

This study proposes models that can be used as shorthand analysis tools for CDS spreads and CDS spread changes. For this purpose, we examine the determinants of CDS spreads and spread changes on a broad database of 718 US firms during the period from early 2002 to early 2013. Contrary to previous studies, we find that market variables have explanatory power after controlling for firm-specific variables inspired by structural models. Three explanatory variables appear to outperform the other variables examined in this paper: Stock Return, the change in stock return volatility, and the change in the median CDS spread in the rating class. We also find that models used in the event study literature to explain spread changes can be improved by adding market variables. Furthermore, we show that ratings explain cross-sectional variation in CDS spreads even after controlling for structural model variables.

Original languageEnglish
Pages (from-to)271-282
Number of pages12
JournalJournal of Banking and Finance
Volume41
Issue number1
DOIs
StatePublished - 1 Jan 2014

Keywords

  • CDS
  • Corporate bond
  • Credit Default Swap
  • Credit spread
  • Structural model

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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