Valuation of systematic risk in the cross-section of credit default swap spreads

Abstract

This paper analyses the pricing of systematic risk factors in credit default swap contracts in a two-stage empirical framework. In the first pass, we estimate contractspecific sensitivities to several systematic risk factors by time-series regressions using quoted credit default swap (CDS) spreads of 339 U.S. entities from 2004 to 2010. We find that the credit market climate, the cross-market correlation and the market volatility explain CDS spread changes. In the second pass, we examine by crosssection regressions whether the contract-specific sensitivities to these systematic risk factors are priced in the cross-section of swap contracts by controlling for individual risk factors such as credit ratings, liquidity and leverage. We find that our basic risk factors explain about 83% of the CDS spreads prior to the crisis and about 90% during the crisis.

Investigation and Modelling of Economic Systematic Risk and Capital Requirement: A Monte Carlo Simulation

“…The measure of economic sensitivity to systematic risk w has been the subject of several studies: Dietsch and Petey ( 2004) developed an approach based on the correlation between a borrower's assets; Bystrôm et al (2005) followed a deductive approach, calculating the default distance using the Merton model and then deducting the sensitivities of the systematic factors in relation to default distance; Düllmann and Scheule (2003) and Dietsch and Petey (2008) used the default transition probabilities matrices of borrowers; Düllmann et al (2007), La Porta et al (2002), calculated the correlation between the returns of listed and unlisted shares of borrowers; and Clauβen et al (2017) adopted the approach of Musto and Souleles (2006) by estimating the sensitivity to systematic risk by the CAPM-Beta model. They concluded that the borrower's systematic risk has been priced better beyond idiosyncratic factors and that it increases in crisis periods.…”

Relación dinámica entre los Credit Default Swaps y la deuda pública. Análisis en el contexto latinoamericano

“…Probablemente, el más simple, y uno de las más exitosos, sea el modelo de exponencial suavizada que puede expresarse como muestra la ecuación (6).…”