nep-fmk New Economics Papers
on Financial Markets
Issue of 2013‒12‒20
two papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. THE DETERMINANTS OF CDS SPREADS By Koresh Galil; Offer Moshe Shapir; Dan Amiram; Uri Ben-Zion
  2. Sovereign bond risk premiums By Dockner, Engelbert J.; Mayer, Manuel; Zechner, Josef

  1. By: Koresh Galil (BGU); Offer Moshe Shapir (BGU); Dan Amiram (Columbia Business School); Uri Ben-Zion (Western Galilee College)
    Abstract: This study proposes models that can be used as shorthand analysis tools for CDS spreads and CDS spread changes. For this purpose we examine the determinants of CDS spreads and spread changes on a broad database of 718 US firms during the period from early 2002 to early 2013. Contrary to previous studies, we discover that market variables still have explanatory power after controlling for firm-specific variables inspired by structural models. Three explanatory variables appear to overshadow the other variables examined in this paper: Stock Return, ?Volatility (the change in stock return volatility) and ?MRI (change in the median CDS spread in the rating class). We also discover that models used in the event study literature to explain spread changes can be improved by using additional market variables. Further, we show that ratings explain cross-section variation in CDS spreads even after controlling for structural model variables.
    Keywords: Credit Default Swap; CDS; Credit spread; Corporate bond; Structural model
    JEL: G12 G13
    Date: 2013
  2. By: Dockner, Engelbert J.; Mayer, Manuel; Zechner, Josef
    Abstract: Credit risk has become an important factor driving government bond returns. We therefore introduce an asset pricing model which exploits information contained in both forward interest rates and forward CDS spreads. Our empirical analysis covers euro-zone countries with German government bonds as credit risk-free assets. We construct a market factor from the first three principal components of the German forward curve as well as a common and a country-specific credit factor from the principal components of the forward CDS curves. We find that predictability of risk premiums of sovereign euro-zone bonds improves substantially if the market factor is augmented by a common and an orthogonal country-specific credit factor. While the common credit factor is significant for most countries in the sample, the country-specific factor is significant mainly for peripheral euro-zone countries. Finally, we find that during the current crisis period, market and credit risk premiums of government bonds are negative over long subintervals, a finding that we attribute to the presence of financial repression in euro-zone countries. --
    Keywords: Sovereign bond risk premiums,Market and credit risk factors,Financial repression
    Date: 2013

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