Firm Policies and the Cross-Section of CDS Spreads

Gamba, Andrea; Saretto, Alessio

doi:10.2139/ssrn.2120904

Download This Paper

Open PDF in Browser

Add Paper to My Library

Firm Policies and the Cross-Section of CDS Spreads

WBS Finance Group Research Paper No. 191

62 Pages Posted: 31 Jul 2012 Last revised: 26 Dec 2019

See all articles by Andrea Gamba

Alessio Saretto

Federal Reserve Banks - Federal Reserve Bank of Dallas

Date Written: 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.

Keywords: CDS, leverage, credit risk, default

JEL Classification: G12, G32

Suggested Citation: Suggested Citation

Gamba, Andrea and Saretto, Alessio, Firm Policies and the Cross-Section of CDS Spreads (August 7, 2013). WBS Finance Group Research Paper No. 191, Available at SSRN: https://ssrn.com/abstract=2120904 or http://dx.doi.org/10.2139/ssrn.2120904