Valuation of Systematic Risk in the Cross-Section of Credit Default Swap Spreads

58 Pages Posted: 17 Nov 2013

See all articles by Sebastian Löhr

Sebastian Löhr

Leibniz Universität Hannover

Arndt Claussen

Leibniz Universität Hannover

Daniel Roesch

University of Regensburg

Harald (Harry) Scheule

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network

Date Written: August 20, 2013

Abstract

This paper analyses the pricing of systematic risk factors in credit default swap contracts in a two-stage empirical framework. In the first pass, we estimate contract-specific sensitivities to several systematic risk factors by time-series regressions using quoted credit default swap (CDS) spreads of 339 U.S. entities from 2004 to 2010. We find that the credit market climate, the cross-market correlation and the market volatility explain CDS spread changes. In the second pass, we examine by crosssection regressions whether the contract-specific sensitivities to these systematic risk factors are priced in the cross-section of swap contracts by controlling for individual risk factors such as credit ratings, liquidity and leverage. We find that our basic risk factors explain about 83% of the CDS spreads prior to the crisis and about 90% during the crisis.

Keywords: Credit Derivatives, Cross-section of Credit Default Swap Spreads, Systematic Risk

JEL Classification: C16, C50, G21, G24

Suggested Citation

Löhr, Sebastian and Claussen, Arndt and Roesch, Daniel and Scheule, Harald, Valuation of Systematic Risk in the Cross-Section of Credit Default Swap Spreads (August 20, 2013). Available at SSRN: https://ssrn.com/abstract=2354874 or http://dx.doi.org/10.2139/ssrn.2354874

Sebastian Löhr

Leibniz Universität Hannover ( email )

Institut fur Rechnungslegung und WP
Koenigsworther Platz 1
Hannover, 30167
Germany

Arndt Claussen

Leibniz Universität Hannover ( email )

Institut fur Rechnungslegung und WP
Koenigsworther Platz 1
Hannover, 30167
Germany

Daniel Roesch (Contact Author)

University of Regensburg ( email )

Chair of Statistics and Risk Management
Faculty of Business, Economics and BIS
Regensburg, 93040
Germany

HOME PAGE: http://www-risk.ur.de/

Harald Scheule

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

P.O. Box 123
Broadway, NSW 2007
Australia

HOME PAGE: http://https://www.uts.edu.au/staff/harald.scheule

Financial Research Network ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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