Common Factors in Credit Defaults Swap Markets
19 Pages Posted: 2 Mar 2016
Date Written: April 20, 2015
Abstract
We examine what are the common factors that determine systematic credit risk, and estimate and interpret these factors. We also compare the contributions of common factors in explaining the changes of credit default swap spreads during the pre-crisis, the crisis and the post-crisis period; there is evidence to suggest that the eigenstructures across these three sub-periods are distinct. Furthermore, we examine whether the observable economic variables are in fact the underlying latent factors and analyze the predictability in the factors that capture the time-variation of credit default swap spreads.
Keywords: redit default swaps, Common factors, Credit risk, Factor model
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