The Determinants of CDS Spreads
30 Pages Posted: 1 Dec 2013 Last revised: 30 Nov 2017
Date Written: January 15, 2014
This study proposes models that can be used as shorthand analysis tools for CDS spreads and CDS spread changes. For this purpose, we examine the determinants of CDS spreads and spread changes on a broad database of 718 US firms during the period from early 2002 to early 2013. Contrary to previous studies, we discover that market variables have explanatory power after controlling for firm-specific variables inspired by structural models. Three explanatory variables appear to outperform the other variables examined in this paper: stock Return, ∆Volatility (the change in stock return volatility), and ∆MRI (change in the median CDS spread in the rating class). We also discover that models used in the event study literature to explain spread changes can be improved by using additional variables. Furthermore, we show that ratings explain cross-sectional variation in CDS spreads even after controlling for structural model variables.
Keywords: Credit default swap, CDS, credit spread, corporate bond, structural model
JEL Classification: G12, G13
Suggested Citation: Suggested Citation