Explaining Aggregate Credit Default Swap Spreads

34 Pages Posted: 29 Jun 2009 Last revised: 9 Feb 2012

Date Written: January 31, 2012

Abstract

We examine risk factors that explain daily changes in aggregate credit default swap (CDS) spreads before, during and after the 2007-2009 financial crisis. Based on the European iTraxx CDS index universe, we document time-variation in the significance of spread determinants. Before and after the crisis, spread changes are mainly determined by stock returns and implied stock market volatility. Global financial variables possess explanatory power during the pre-crisis and the crisis period. Liquidity proxy variables are significantly related to spread changes for financials, while unrelated for non-financials. Examination of the risk factors' explanatory power for large spread changes reveals weakened significance indicating that additional factors are necessary for their explanation. Finally, we examine the lead-lag relationship between spread changes and stock returns. Stock market returns lead spread changes during the crisis period, while a bidirectional relationship emerges after the crisis period. This suggests that aggregate spread changes are actually informative for equity market participants, possibly measuring systemic risk.

Keywords: aggregate credit risk, credit default swaps, credit and stock markets, extreme spread changes, financial crisis, systemic risk, iTraxx

Suggested Citation

Breitenfellner, Bastian and Wagner, Niklas F., Explaining Aggregate Credit Default Swap Spreads (January 31, 2012). Available at SSRN: https://ssrn.com/abstract=1425563 or http://dx.doi.org/10.2139/ssrn.1425563

Bastian Breitenfellner

Passau University ( email )

Innstrasse 27
Passau, 94032
Germany

HOME PAGE: http://www.wiwi.uni-passau.de/index.php?id=2285&L=2

Niklas F. Wagner (Contact Author)

Passau University ( email )

Innstrasse 27
Passau, 94030
Germany

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
421
Abstract Views
2,354
Rank
127,812
PlumX Metrics