Accounting-Based Versus Market-Based Cross-Sectional Models of CDS Spreads
Sanjiv Ranjan Das
Santa Clara University - Leavey School of Business
Villanova University - School of Business
Santa Clara University - Department of Finance
September 25, 2009
Journal of Banking and Finance, Vol. 33, No. 4, 2009
Models of financial distress rely primarily on accounting-based information (e.g. [Altman, E., 1968. Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. Journal of Finance 23, 589–609; Ohlson, J., 1980. Financial ratios and the probabilistic prediction of bankruptcy. Journal of Accounting Research 19, 109–131]) or market-based information (e.g.[Merton, R.C., 1974. On the pricing of corporate debt: The risk structure of interest rates. Journal of Finance 29, 449–470]). In this paper, we provide evidence on the relative performance of these two classes of models. Using a sample of 2860 quarterly CDS spreads we find that a model of distress using accounting metrics performs comparably to market-based structural models of default. Moreover, a model using both sources of information performs better than either of the two models. Overall, our results suggest that both sources of information (accounting- and market-based) are complementary in pricing distress.
Keywords: Credit default swap, Credit risk, Bankruptcy prediction
JEL Classification: M41, G1, G12, C41, C42Accepted Paper Series
Date posted: August 30, 2010
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