Abstract

http://ssrn.com/abstract=2120904
 
 

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Firm Policies and the Cross-Section of CDS Spreads


Andrea Gamba


University of Warwick - Finance Group

Alessio Saretto


University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

August 7, 2013


Abstract:     
We solve the credit spread puzzle with a structural model of firm’s policies that endogenously replicates the empirical cross-section of credit spreads. Structural estimation of the model's parameters reveals that the model cannot be rejected by the data, and that endogenous investment decisions are major determinants of CDS spreads. We also verify that controlling for financial leverage, CDS spreads are positively related to operating leverage, and negatively related to growth opportunities. Consistent with the idea that growth options reduce credit risk, investments are negatively correlated with changes in CDS spreads.

Number of Pages in PDF File: 62

Keywords: CDS, leverage, credit risk, default

JEL Classification: G12, G32

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Date posted: July 31, 2012 ; Last revised: March 11, 2014

Suggested Citation

Gamba, Andrea and Saretto, Alessio, Firm Policies and the Cross-Section of CDS Spreads (August 7, 2013). Available at SSRN: http://ssrn.com/abstract=2120904 or http://dx.doi.org/10.2139/ssrn.2120904

Contact Information

Andrea Gamba
University of Warwick - Finance Group ( email )
Scarman Road
Coventry, CV4 7AL
Great Britain
+44 (0)24 765 24 542 (Phone)
+44 (0)24 765 23 779 (Fax)
Alessio Saretto (Contact Author)
University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )
800 Campbell Road
SM 31
Richardson, TX 75080
United States
972-883-5907 (Phone)
HOME PAGE: http://www.utdallas.edu/~axs125732
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