What Determines CDS Prices? Evidence from the Estimation of Protection Demand and Supply

28 Pages Posted: 22 Mar 2014

Date Written: March 2014

Abstract

This paper examines the determinants of credit default swap (CDS) premiums by applying a limited dependent variable simultaneous equation system to a unique set of time series data for the Japanese credit market. The estimation results indicate that CDS premiums decrease as a result of an increase in the supply of protection due, for example, to fewer opportunities for investment in other assets (e.g., loans). We also find that premiums increase when the demand for protection increases due, for example, to larger short‐cover needs. Further, the quantitative impact of factors accounting for the supply and demand of protection is likely to be misestimated unless the simultaneous determination of supply and demand is taken into account. This indicates that it is necessary to include demand and supply factors to understand fluctuations in CDS premiums.

JEL Classification: G12, C34, C36

Suggested Citation

Miyakawa, Daisuke and Watanabe, Shuji, What Determines CDS Prices? Evidence from the Estimation of Protection Demand and Supply (March 2014). International Review of Finance, Vol. 14, Issue 1, pp. 1-28, 2014, Available at SSRN: https://ssrn.com/abstract=2412780 or http://dx.doi.org/10.1111/irfi.12022

Daisuke Miyakawa

Hitotsubashi University ( email )

2-1-2 Hitotsubashi, Chiyoda-ku
Tokyo, 101-8439
Japan
+81342123010 (Phone)
+81342123020 (Fax)

HOME PAGE: http://https://sites.google.com/site/daisukemiyakawaphd/

Shuji Watanabe

Nihon University ( email )

Tokyo
Japan
+81-3-3219-3493 (Phone)
+81-3-3219-3493 (Fax)

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