Market Conditions, Default Risk and Credit Spreads

By D. Tang, Hongjun Yan. 2010

375 citations recorded by the source corpus.

This study empirically examines the impact of the interaction between market and default risk on corporate credit spreads. Using credit default swap (CDS) spreads, we find that average credit spreads decrease in GDP growth rate, but increase in GDP growth volatility and jump risk in the equity market. At the market level, investor sentiment is the most important determinant of credit spreads. At the firm level, credit spreads generally rise with cash flow volatility and beta, with the effect of cash flow beta varying with market conditions. We identify implied volatility as the most significant determinant of default risk among firm-level characteristics. Overall, a major portion of individual credit spreads is accounted for by firm-level determinants of default risk, while macroeconomic variables are directly responsible for a lesser portion.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/d485acc58bcd4b060cee05aa2473c7de4f56e84e

How researchers see this paper

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

In Accounting

1. Rudi Vander Vennet
2. G. Schepens
3. Olivier De Jonghe

In Finance

1. Rudi Vander Vennet
2. G. Schepens
3. Dinesh Gajurel
4. Mardi Dungey
5. Olivier De Jonghe

Citations in the corpus

• Bank/Sovereign Risk Spillovers in the European Debt Crisis (2012, background): “Wheelock and Wilson (2000) and Altunbas, Manganelli, and Marques-Ibanez (2011)) our …ndings suggest that adequate capital levels are also an important bu¤er against contagion.”
• Economic uncertainty and bank risk: Evidence from emerging economies (2020, neutral): “Using seasonally adjusted data, we measure output growth as the monthly difference of the logarithm of industrial production index, inflation rate as that of the logarithm of consumer price index, and currency depreciation rate as the monthly changes of the domestic currencies’ foreign exchange rate”
• Safer Ratios, Riskier Portfolios: Banks’ Response to Government Aid (2014, neutral): “The measures of borrower risk include Cash flow volatility, Intangible assets, and Interest coverage, which have been shown to be correlated with default risk (Blume, Lim, and MacKinlay, 1998; Tang and Yan, 2010; Douglas, Huang, and Vetzal, 2012).”
• Corporate Bond Credit Spreads and Forecast Dispersion (2010, neutral): “Similarly, Tang and Yan (2010) report that firm-level implied volatility explains the cross-sectional variation in credit default swap spreads.”