The Empirical Determinants of Credit Default Swap Spreads: A Quantile Regression Approach

34 Pages Posted: 2 Jun 2015

See all articles by Pedro Pires

Pedro Pires

Nova School of Business and Economics

João Pedro Pereira

Nova School of Business and Economics

Luis Filipe Martins

University Institute of Lisbon (IUL) - School of Business

Date Written: June 2015

Abstract

We study the empirical determinants of Credit Default Swap (CDS) spreads through quantile regressions. In addition to traditional variables, such as implied volatility, put skew, historical stock return, leverage, profitability, and ratings, the results indicate that CDS premiums are strongly determined by CDS illiquidity costs, measured by absolute bid‐ask spreads. The quantile regression approach reveals that high‐risk firms are more sensitive to changes in the explanatory variables that low‐risk firms. Furthermore, the goodness‐of‐fit of the model increases with CDS premiums, which is consistent with the credit spread puzzle.

Keywords: credit default swap, credit risk, liquidity, quantile regression

Suggested Citation

Pires, Pedro M. and Pereira, João Pedro S.S. and Martins, Luis Filipe, The Empirical Determinants of Credit Default Swap Spreads: A Quantile Regression Approach (June 2015). European Financial Management, Vol. 21, Issue 3, pp. 556-589, 2015, Available at SSRN: https://ssrn.com/abstract=2613176 or http://dx.doi.org/10.1111/j.1468-036X.2013.12029.x

Pedro M. Pires (Contact Author)

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

João Pedro S.S. Pereira

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

Luis Filipe Martins

University Institute of Lisbon (IUL) - School of Business ( email )

Dept of Quantitative Methods
Av Forcas Armadas
Lisbon, 1649-026
Portugal

HOME PAGE: http://iscte.pt/~lfsm

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