The Determinants of Credit Default Swap Premia

50 Pages Posted: 7 Oct 2004 Last revised: 5 Sep 2009

See all articles by Jan Ericsson

Jan Ericsson

McGill University; Swedish Institute for Financial Research (SIFR)

Kris Jacobs

University of Houston - C.T. Bauer College of Business

Rodolfo Oviedo

Universidad Austral; McGill University - Desautels Faculty of Management

Date Written: January 2005

Abstract

Using a new dataset of bid and offer quotes for credit default swaps, we investigate the relationship between theoretical determinants of default risk and actual market premia using linear regression. These theoretical determinants are firm leverage, volatility and the riskless interest rate. We find that estimated coefficients for these variables are consistent with theory and that the estimates are highly significant both statistically and economically. The explanatory power of the theoretical variables for levels of default swap premia is approximately 60%. The explanatory power for the differences in the premia is approximately 23%. Volatility and leverage by themselves also have substantial explanatory power for credit default swap premia. A principal component analysis of the residuals and the premia shows that there is only weak evidence for a residual common factor and also suggests that the theoretical variables explain a significant amount of the variation in the data. We therefore conclude that leverage, volatility and the riskfree rate are important determinants of credit default swap premia, as predicted by theory.

Keywords: Credit risk, Credit default swaps

JEL Classification: G12

Suggested Citation

Ericsson, Jan and Jacobs, Kris and Oviedo, Rodolfo, The Determinants of Credit Default Swap Premia (January 2005). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=601082 or http://dx.doi.org/10.2139/ssrn.601082

Jan Ericsson (Contact Author)

McGill University ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
(514) 398-3186 (Phone)
(514) 398-3876 (Fax)

HOME PAGE: http://people.mcgill.ca/jan.ericsson/

Swedish Institute for Financial Research (SIFR)

Drottninggatan 89
SE-113 59 Stockholm, SE-113 60
Sweden

Kris Jacobs

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Rodolfo Oviedo

Universidad Austral ( email )

Rosario, Santa Fe
Argentina
+45 9 341 345 1706 (Phone)

McGill University - Desautels Faculty of Management

Montreal, QC
Canada

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