Measuring Abnormal Credit Default Swap Spreads
53 Pages Posted: 29 Dec 2012 Last revised: 5 Jan 2017
Date Written: January 22, 2016
This paper examines the size and power of test statistics designed to detect abnormal changes in credit risk as measured by credit default swap (CDS) spreads. We follow a simulation approach to examine the statistical properties of normal and abnormal CDS spreads and assess the performance of normal return models and test statistics. Using daily CDS data, we find parametric test statistics to be generally inferior to non-parametric tests, with the rank test performing best. A CDS factor model based on factors identified in the empirical literature is generally well specified and more powerful in detecting abnormal performance than some of the classical normal return models. Finally, we examine abnormal CDS announcement returns around issuer's rating downgrades to demonstrate the effect of CDS spread change measures and normal return models on the inferences drawn from the results of CDS event studies.
Keywords: CDS spread, event study, Brown-Warner simulation
JEL Classification: G14
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