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What Determines CDS Prices? Evidence from the Estimation of Protection Demand and Supply

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  • Sheridan Titman
  • Daisuke Miyakawa
  • Shuji Watanabe

Abstract

This paper examines the determinants of credit default swap (CDS) premiums by applying a limited dependent variable simultaneous equation system to a unique set of time series data for the Japanese credit market. The estimation results indicate that CDS premiums decrease as a result of an increase in the supply of protection due, for example, to fewer opportunities for investment in other assets (e.g., loans). We also find that premiums increase when the demand for protection increases due, for example, to larger short-cover needs. Further, the quantitative impact of factors accounting for the supply and demand of protection is likely to be misestimated unless the simultaneous determination of supply and demand is taken into account. This indicates that it is necessary to include demand and supply factors to understand fluctuations in CDS premiums.

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  • Sheridan Titman & Daisuke Miyakawa & Shuji Watanabe, 2014. "What Determines CDS Prices? Evidence from the Estimation of Protection Demand and Supply," International Review of Finance, International Review of Finance Ltd., vol. 14(1), pages 1-28, March.
    • Handle: RePEc:bla:irvfin:v:14:y:2014:i:1:p:1-28
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    File URL: http://hdl.handle.net/10.1111/irfi.12022
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    Cited by:

    1. Roshanthi Dias, 2017. "The role of managerial risk-taking in the ‘rise and fall’ of the CDS market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57, pages 117-145, April.
    2. Zha, Yiling & Power, David & Tantisantiwong, Nongnuch, 2020. "The cross-country transmission of credit risk between sovereigns and firms in Asia," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 309-320.
    3. José Da Fonseca & Katrin Gottschalk, 2020. "The Co‐Movement of Credit Default Swap Spreads, Equity Returns and Volatility: Evidence from Asia‐Pacific Markets," International Review of Finance, International Review of Finance Ltd., vol. 20(3), pages 551-579, September.

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