The Credit Default Swap Market's Determinants

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.

Number of Pages in PDF File: 29

Keywords: Credit default swap, credit risk, leverage, stock returns, equity volatility.

JEL Classification: G12

working papers series