Regime dependent determinants of credit default swap spreads

By Carol Alexander, Andreas Kaeck. 2008

298 citations recorded by the source corpus.

Credit default swap (CDS) spreads display pronounced regime specific behaviour. A Markov switching model of the determinants of changes in the iTraxx Europe indices demonstrates that they are extremely sensitive to stock volatility during periods of CDS market turbulence. But in ordinary market circumstances CDS spreads are more sensitive to stock returns than they are to stock volatility. Equity hedge ratios are three or four times larger during the turbulent period, which explains why previous research on single-regime models finds stock positions to be ineffective hedges for default swaps. Interest rate movements do not affect the financial sector iTraxx indices and they only have a significant effect on the other indices when the spreads are not excessively volatile. Raising interest rates may decrease the probability of credit spreads entering a volatile period.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/4a3825dfc147714c9e61f25b20fc215257c4194d

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

In Finance

Citations in the corpus

An Analysis of the Determinants of Credit Default Swap Spread Changes Before and During the Subprime Financial Turmoil (2010, methodology): “Moreover, with the exception of Alexander and Kaeck (2008) and Pires et al.”
Financial distress and bankruptcy prediction among listed companies using accounting, market and macroeconomic variables (2013, methodology): “More recently data on Credit Default Swaps (prices and spreads) have been used to proxy credit risk (Alexander & Kaeck, 2008).”
Decomposing European CDS Returns (2010, result): “Boss and Scheicher (2002), Van Landschoot (2004), Annaert et al. (2006), Alexander and Kaeck (2008) and Castagnetti and Rossi (2008) analyze the explanatory power of variables that should in theory determine European credit spread changes, often in a similar fashion to the studies by…”
Credit Default Swaps: A Survey (2014, background): “Alexander and Kaeck [2008] find some support for the hypothesis that theoretical determinants suggested by structural credit risk models partially explain the time series variation in the iTraxx Europe indices.”
Credit Spreads: An Empirical Analysis on the Informational Content of Stocks, Bonds, and CDS (2009, background): “As we previously argued, cointegration test results suggest that for companies in Model II, non-transient components (factors that differ from credit risk or permanent measurement errors) tend to 20 Interestingly, Alexander and Kaeck (2008) report that CDS are extremely sensitive to stock market vol”
A model of carbon price interactions with macroeconomic and energy dynamics (2011, unknown): “Earlier on this topic, based on Markov-switching models, Alexander and Kaeck (2008) sent a warning signal by demonstrating that credit default swap (CDS) spreads are extremely sensitive to stock volatility during periods of CDS market turbulence.”
What Determines Euro Area Bank CDS Spreads (2010, methodology): “These results are consistent with those reported for European financial Itraxx CDS index spread changes by Alexander & Kaeck (2008).”