Explaining Credit Default Swap Spreads by Means of Realized Jumps and Volatilities in the Energy Market

36 Pages Posted: 13 Mar 2015 Last revised: 1 Oct 2015

See all articles by José Da Fonseca

José Da Fonseca

Auckland University of Technology - Faculty of Business & Law

Katja Ignatieva

University of New South Wales - Australian School of Business

Jonathan Ziveyi

UNSW Australia

Date Written: September 22, 2015

Abstract

This paper studies the relationship between credit default swap spreads (CDS) for the Energy sector and oil futures dynamics. Using data on light sweet crude oil futures from 2004 to 2013, which contains a crisis period, we examine the importance of volatility and jumps extracted from the futures in explaining CDS spread changes. The analysis is performed at an index level and by rating group; as well as for the pre-crisis, crisis and post-crisis periods. Our findings are consistent with Merton's theoretical framework. At an index level, futures' jumps are important when explaining CDS spread changes, with negative jumps having higher impact during the crisis. The continuous volatility part is significant and positive indicating that futures volatility conveys relevant information for the CDS market. As for the analysis per rating group, negative jumps have an increasing importance as the credit rating deteriorates, and during the crisis period; while the results for positive jumps and futures volatility are mixed. Overall, the relation between the CDS market and the futures market is stronger during volatile periods and strengthens after the Global Financial Crisis.

Keywords: Oil futures, CDS spread, realized jumps, realized volatility

JEL Classification: G12, G13, C14

Suggested Citation

Da Fonseca, José and Ignatieva, Katja and Ziveyi, Jonathan, Explaining Credit Default Swap Spreads by Means of Realized Jumps and Volatilities in the Energy Market (September 22, 2015). UNSW Business School Research Paper No. 2015ACTL05. Available at SSRN: https://ssrn.com/abstract=2577060 or http://dx.doi.org/10.2139/ssrn.2577060

José Da Fonseca

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
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Auckland Central 1020
New Zealand
64 9 921 9999 5063 (Phone)

Katja Ignatieva (Contact Author)

University of New South Wales - Australian School of Business ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Jonathan Ziveyi

UNSW Australia ( email )

School of Risk and Actuarial Studies
Level 6 East Wing, Business School
Sydney, NSW 2052
Australia
+61 2 9385 8006 (Phone)
+61 2 9385 1883 (Fax)

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