The Determinants of Credit Risk: Analysis of US Industry-level Indices

Abstract

The study examines the cointegration and causal relationship between credit default swap spreads, stock prices, VIX, interest rate and slope of the yield curve for the 10 industries in the USA over the period 14 December 2007 to 30 September 2015. Due to the presence of cross-sectional dependence in the panel, we employ the Pesaran (2007, Journal of Applied Econometrics, 22(2), 265–312) CIPS test to ascertain unit root properties. The cointegration test underscores the presence of a long-run association between the variables. The long-run heterogeneous panel elasticities are estimated via Dynamic OLS (DOLS) and the causality is examined by using the Dumitrescu and Hurlin (2012, Economic Modelling, 29(4), 1450–1460) Granger causality tests. The empirical results reveal that stock prices (volatility), interest rate and slope of the yield curve decrease (increase) the CDS premia; and stock prices, VIX and interest rate Granger-cause the CDS spreads for most of the industries.

An Empirical Analysis of the Relationship Between Türkiye’s CDS Premium and Economic, Financial and Political Risk

“…Çonkar and Vergili (2017) identify a one-way causal relationship between exchange rates and CDS premia. Shahzad et al (2017) posit that stock prices, interest rates and the yield curve slope significantly affect the explained variable. Guesmi et al (2018) establish a non-linear relationship between stock prices and financial determinants with CDS premia.…”