Factor Determinants of Credit Default Swap Spreads

Abstract:     
I examine the theoretical determinants for US and European credit default swap spreads. In contrast to previous results, I find that interest rates play a smaller role in determining spreads, and that other equity factors, such as momentum and the Fama-French small-minus-big factor play substantial roles in determining credit default swap spreads. I also allow for coefficients to change over time and find that determinants of credit default swaps spreads change significantly as the volatility of swap spreads rise. Interest rates are found to be significant determinants of the underlying volatility of swap spreads.

Keywords: swaps, credit default, CDS

JEL Classifications: G15

Working Paper Series