Accounting-Based Versus Market-Based Cross-Sectional Models of CDS Spreads

Posted: 30 Aug 2010

See all articles by Sanjiv Ranjan Das

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business

Paul Hanouna

Villanova University - School of Business

Atulya Sarin

Santa Clara University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: September 25, 2009

Abstract

Models of financial distress rely primarily on accounting-based information (e.g. [Altman, E., 1968. Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. Journal of Finance 23, 589–609; Ohlson, J., 1980. Financial ratios and the probabilistic prediction of bankruptcy. Journal of Accounting Research 19, 109–131]) or market-based information (e.g.[Merton, R.C., 1974. On the pricing of corporate debt: The risk structure of interest rates. Journal of Finance 29, 449–470]). In this paper, we provide evidence on the relative performance of these two classes of models. Using a sample of 2860 quarterly CDS spreads we find that a model of distress using accounting metrics performs comparably to market-based structural models of default. Moreover, a model using both sources of information performs better than either of the two models. Overall, our results suggest that both sources of information (accounting- and market-based) are complementary in pricing distress.

Keywords: Credit default swap, Credit risk, Bankruptcy prediction

JEL Classification: M41, G1, G12, C41, C42

Suggested Citation

Das, Sanjiv Ranjan and Hanouna, Paul E. and Sarin, Atulya, Accounting-Based Versus Market-Based Cross-Sectional Models of CDS Spreads (September 25, 2009). Journal of Banking and Finance, Vol. 33, No. 4, 2009, Available at SSRN: https://ssrn.com/abstract=1478691

Sanjiv Ranjan Das (Contact Author)

Santa Clara University - Leavey School of Business ( email )

Department of Finance
316M Lucas Hall
Santa Clara, CA 95053
United States

HOME PAGE: http://srdas.github.io/

Paul E. Hanouna

Villanova University - School of Business ( email )

800 Lancaster Avenue
Villanova, PA 19085-1678
United States

Atulya Sarin

Santa Clara University - Department of Finance ( email )

Leavey School of Business and Administration
Santa Clara, CA 95053
United States
408-554-4953 (Phone)
408-904-4498 (Fax)

HOME PAGE: http://business.scu.edu/asarin

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