The Role of a Changing Market Environment for Credit Default Swap Pricing

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis paper investigates the impact of a changing market environment on the pricing of CDS spreads written on debt from EURO STOXX 50 firms. A Panel Smooth Transition Regression reveals that parameter estimates of standard CDS fundamentals are time-varying depending on current values of a set of variables such as the ECB's systemic stress composite index, the Sentix index for current and future economic situation, and the VStoxx. These variables describe the market's transition between different regimes thereby reflecting the impact of substantial swings in agents' risk perception on CDS spreads. Overall, our results confirm the importance of nonlinearities in the pricing of risk derivatives during tranquil and turbulent times.

Price discovery in the markets for credit risk: a Markov switching approach

“…The pronounced regime specific behavior displayed by CDS spreads has been previously documented by Alexander and Kaeck (2008) and Leppin and Reitz (2014) among others. Both studies report changes in the dynamics of CDS prices depending on high and low volatility regimes.However, previous price discovery studies have neglected this characteristic.…”

Macroeconomic determinants of credit risk: Evidence from the Eurozone

“…The Merton distance to default is a special measure that results from this approach and has been widely used in the literature (e.g., Bharath & Shumway, 2008; Vassalou & Xing, 2004). An example of extensions of the market model approach of credit risk is discussed by Leppin and Reitz (2016), who investigate the impact of a changing market environment on the pricing of credit default swaps (CDS) spreads written on debt from EURO STOXX 50 firms. They find that CDS‐pricing variables are time varying depending on current values of a set of variables such as the European Central Bank's composite index of systemic stress, the Sentix index for the current and future economic situation and the VStoxx, the latter two used as benchmarks for investors' market expectations and economic uncertainty.…”

Dynamics of the European sovereign bonds and the identification of crisis periods

“…Smooth Transition Autoregression (STAR) framework which has been employed to investigate asset pricing and expectation formation in an increasing number of applications. For instance, Reitz and Westerho¤ (2007) Leppin and Reitz (2014) also apply the same model of PSTR to study the changing market environment on the pricing of CDS spreads.…”