What Drives the Commonality between Credit Default Swap Spread Changes?

54 Pages Posted: 21 Mar 2012 Last revised: 26 Feb 2016

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2015

Abstract

This paper documents an increase in the correlations between credit default swap (CDS) spread changes during the 2007-2009 crisis and investigates the source of that increase. One possible explanation is that correlations increased because fundamental values became more correlated. However, I find that changes in fundamentals account for only 20% of the increase in correlations. The remaining increase is attributed to changes in the market price of default risk, as evidenced by an increase in the volatility of the default risk premium. Additionally, I find that changes in liquidity risk increased correlations whereas changes in counterparty risk did not.

Keywords: contagion, credit default swap, default, CDS, crisis, correlation, diversification, systemic risk, systematic risk

Suggested Citation

Anderson, Mike, What Drives the Commonality between Credit Default Swap Spread Changes? (May 1, 2015). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2023043 or http://dx.doi.org/10.2139/ssrn.2023043

Mike Anderson (Contact Author)

Mike Anderson ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

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