Measuring Abnormal Credit Default Swap Spreads

56 Pages Posted: 29 Dec 2012 Last revised: 30 Jun 2021

See all articles by Christian Andres

Christian Andres

WHU - Otto Beisheim School of Management

André Betzer

University of Wuppertal - Schumpeter School of Business and Economics

Markus Doumet

BUW- Schumpeter School of Business and Economics

Date Written: June 26, 2021

Abstract

This paper examines the size and power of test statistics designed to detect abnormal changes in credit risk as measured by credit default swap (CDS) spreads. We follow a simulation approach to examine the statistical properties of normal and abnormal CDS spread changes and assess the performance of normal return models and test statistics. Using daily CDS data, we find parametric test statistics to be generally inferior to non-parametric tests, with the rank test performing best. A CDS factor model based on factors identified in the empirical literature is generally well specified and more powerful in detecting abnormal performance than some of the classical normal return models. Finally, we examine abnormal CDS announcement spread changes around issuer’s rating downgrades to demonstrate the effect of different CDS spread change measures and normal return models on event study results.

Keywords: CDS spread, event study, Brown-Warner simulation

JEL Classification: G14

Suggested Citation

Andres, Christian and Betzer, André and Doumet, Markus, Measuring Abnormal Credit Default Swap Spreads (June 26, 2021). Global Finance Journal, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2194320 or http://dx.doi.org/10.2139/ssrn.2194320

Christian Andres

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

André Betzer

University of Wuppertal - Schumpeter School of Business and Economics ( email )

Gaußstraße 20
Wuppertal
Germany

HOME PAGE: http://finance.uni-wuppertal.de/index.php?id=1153

Markus Doumet (Contact Author)

BUW- Schumpeter School of Business and Economics ( email )

Gaussstrasse 20
Wuppertal, 42119
Germany

HOME PAGE: http://finance.uni-wuppertal.de/

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