Corporate Credit Default Swap Systematic Factors

Abstract

This study examines the statistical significance of systematic and firm-specific determinants of Credit Default Swap (CDS) price variations. We cast doubt on the firm-specific determinants showed in prior research to be statistical significance to CDS price variations. In this paper, two research questions are studied: (1) ``Which and to what extent systematic factors can explain the individual CDS price variations?'' and (2) ``Which and to what extent the firm-specific factors can predict CDS spread variations that are not explained by systematic factors?''. We find that systematic factors account for the majority changes of the CDS spreads (R2 = 35%). Merely 4 of 28 firm-specific factors are statistically significant predictors for CDS changes that are not explained by the systematic factors and they have little explanatory power (R2 = 8%). We document that individual CDS variations can be more related to the systematic factors than to firm-specific factors.

Keywords: Credit Default Swap (CDS), CDS Systematic Factors

JEL Classification: G12