Spread Risk Premia in Corporate Credit Default Swap Markets

Credit and Capital Markets, Vol. 47, No. 4, pp. 571-610, 2014

44 Pages Posted: 18 Nov 2011 Last revised: 16 Mar 2016

See all articles by Oliver Entrop

Oliver Entrop

University of Passau

Richard Schiemert

Catholic University of Eichstaett-Ingolstadt

Marco Wilkens

University of Augsburg

Date Written: 2014

Abstract

The spread risk premium component of credit default swap (CDS) spreads represents a compensation demanded by protection sellers for future changes in CDS spreads caused by unpredictable fluctuations in the reference entity’s risk-neutral default intensity. This paper defines and estimates a measure of the spread risk premium component in CDS spreads of a sample of European investment-grade firms by using a stochastic intensity credit model. Our results show that, on average, investors demand a positive premium for such mark-to-market risks. After controlling for CDS market conditions, like liquidity and supply/demand effects, a panel data analysis of the estimated spread risk premia reveals among other things a significant positive impact of event risk captured by the overall stock market volatility and of investors’ appetite for exposure to credit markets as reflected by the overall CDS market.

Keywords: credit default swap, default risk premium, default event risk premium, spread risk premium, mark-to-market risk premium, stochastic intensity model

JEL Classification: G12, G13, G15

Suggested Citation

Entrop, Oliver and Schiemert, Richard and Wilkens, Marco, Spread Risk Premia in Corporate Credit Default Swap Markets (2014). Credit and Capital Markets, Vol. 47, No. 4, pp. 571-610, 2014. Available at SSRN: https://ssrn.com/abstract=1961197 or http://dx.doi.org/10.2139/ssrn.1961197

Oliver Entrop (Contact Author)

University of Passau ( email )

Innstrasse 27
Passau, 94032
Germany
+49 851 509 2460 (Phone)
+49 851 509 2462 (Fax)

Richard Schiemert

Catholic University of Eichstaett-Ingolstadt ( email )

Auf der Schanz 49
Ingolstadt, D-85049
Germany

HOME PAGE: http://www.schiemert.com/

Marco Wilkens

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4124 (Phone)
+49 821 598 4223 (Fax)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/wilkens_marco/

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