Exploring for the Determinants of Credit Risk in Credit Default Swap Transaction Data

Cossin, Didier; Hricko, Tomas

doi:10.2139/ssrn.273454

“…Although CGM themselves estimate bond yield spreads, 9 a similar approach using CDS premia is taken by Cossin and Hricko (2001), Aunon-Nerin et al (2002), Abid and Naifar (2005), and Ericsson et al (2005).…”

mentioning

confidence: 99%

The Impact of Earnings on the Pricing of Credit Default Swaps

Callen

¹

,

Livnat

²

,

Segal

³

2009

The Accounting Review

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This study evaluates the impact of earnings on firm credit risk as captured by Credit Default Swaps (CDS). We find that earnings (changes) are negatively correlated with one-year swap premia (changes) after controlling for equity returns but not with longer term premia (changes). We also find that earnings surprises are significantly correlated with one-year CDS premia changes in the short window surrounding preliminary earnings dates and that absolute earnings surprises are significantly correlated with absolute one-year CDS premia changes in the short window surrounding SEC filing dates. These results suggest that high earnings convey favorable information about the short-term default risk of firms but not about the long term default risk. We further document that accruals/cash flow information conveyed by SEC filings provides information about long-term credit risk. Furthermore, the empirical results are consistent with structural and hybrid model-driven implications of CDS pricing. The Impact of Earnings on the Pricing of Credit Default Swaps ABSTRACTThis study evaluates the impact of earnings on firm credit risk as captured by Credit Default Swaps (CDS). We find that earnings (changes) are negatively correlated with one-year swap premia (changes) after controlling for equity returns but not with longer term premia (changes). We also find that earnings surprises are significantly correlated with one-year CDS premia changes in the short window surrounding preliminary earnings dates and that absolute earnings surprises are significantly correlated with absolute one-year CDS premia changes in the short window surrounding SEC filing dates. These results suggest that high earnings convey favorable information about the short-term default risk of firms but not about the long term default risk. We further document that accruals/cash flow information conveyed by SEC filings provides information about long-term credit risk. Furthermore, the empirical results are consistent with structural and hybrid model-driven implications of CDS pricing.1

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“…Although CGM themselves estimate bond yield spreads, 9 a similar approach using CDS premia is taken by Cossin and Hricko (2001), Aunon-Nerin et al (2002), Abid and Naifar (2005), and Ericsson et al (2005).…”

mentioning

confidence: 99%

“…Based on a sample of 393 multi-country CDS transactions, Cossin and Hricko (2001) and Aunon-Nerin et al (2002) estimate levels regressions to examine whether leverage, credit ratings, US and other national risk-free interest rates, the slope of the (US) yield curve, stock prices, time to maturity, stock volatility, market capitalization (liquidity), and country stock index returns explain CDS spreads. Depending upon the specific levels regression 10 , they find that a number of these factors significantly explain 8 One can think of the linear regressions in this paper as a first-order approximation to a structural model.…”

mentioning

confidence: 99%

The Impact of Earnings on the Pricing of Credit Default Swaps

Callen

¹

,

Livnat

²

,

Segal

³

2007

View full text Add to dashboard Cite

This study evaluates the impact of earnings on firm credit risk as captured by Credit Default Swaps (CDS). We find that earnings (changes) are negatively correlated with one-year swap premia (changes) after controlling for equity returns but not with longer term premia (changes). We also find that earnings surprises are significantly correlated with one-year CDS premia changes in the short window surrounding preliminary earnings dates and that absolute earnings surprises are significantly correlated with absolute one-year CDS premia changes in the short window surrounding SEC filing dates. These results suggest that high earnings convey favorable information about the short-term default risk of firms but not about the long term default risk. We further document that accruals/cash flow information conveyed by SEC filings provides information about long-term credit risk. Furthermore, the empirical results are consistent with structural and hybrid model-driven implications of CDS pricing. The Impact of Earnings on the Pricing of Credit Default Swaps ABSTRACTThis study evaluates the impact of earnings on firm credit risk as captured by Credit Default Swaps (CDS). We find that earnings (changes) are negatively correlated with one-year swap premia (changes) after controlling for equity returns but not with longer term premia (changes). We also find that earnings surprises are significantly correlated with one-year CDS premia changes in the short window surrounding preliminary earnings dates and that absolute earnings surprises are significantly correlated with absolute one-year CDS premia changes in the short window surrounding SEC filing dates. These results suggest that high earnings convey favorable information about the short-term default risk of firms but not about the long term default risk. We further document that accruals/cash flow information conveyed by SEC filings provides information about long-term credit risk. Furthermore, the empirical results are consistent with structural and hybrid model-driven implications of CDS pricing.1

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“…The opposite is true for the firm's stock return, as a higher growth in firm earnings implies the lower probability of default. The credit rating information is another important factor in determining CDS spreads (Cossin and Hricko, 2001). Tang and Yan (2008), however, use Moody's KMV Expected Default Frequency (EDF), instead of Moody's and S&P credit ratings, as a measure of default probability.…”

Section: Determinants Of Cds Spreads: Theoretical and Empirical Evidencementioning

confidence: 99%

Determinants of credit default swaps spreads in European and Asian markets

Hassan

¹

,

Ngow²,

Yu³

et al. 2013

J Deriv Hedge Funds

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This article re-examines the determinants of credit default swaps (CDS) spreads in the United States, Europe and Asia-Pacific markets with new data set using linear regressions. These determinants are categorized into two groups: firm-level and macroeconomic variables. We also include two non-traditional moment risk variables in the analysis as we suspect that these measures may capture the effects of possible extreme downside risk, or extreme negative scenarios, in the underlying credit valuation process. Our findings from the United States and abroad confirm the existing evidence on the significant relationship between theoretical determinants of default risk and actual market pricing of CDS. In addition, we provide additional evidence on the importance of the

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Exploring for the Determinants of Credit Risk in Credit Default Swap Transaction Data

Cited by 36 publications

References 36 publications

The Impact of Earnings on the Pricing of Credit Default Swaps

The Impact of Earnings on the Pricing of Credit Default Swaps

The Impact of Earnings on the Pricing of Credit Default Swaps

Determinants of credit default swaps spreads in European and Asian markets

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