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The determinants of CDS spreads: evidence from the model space

Author

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  • Matthias Pelster

    (Leuphana University Lueneburg)

  • Johannes Vilsmeier

    (Deutsche Bundesbank)

Abstract

We apply Bayesian model averaging and a frequentistic model space analysis to assess the pricing determinants of credit default swaps (CDSs). Our study focuses on the complete model space of plausible models and thus supports ultimate robustness. Using a large dataset of CDS contracts we find that CDS price dynamics can be mainly explained by factors describing firms’ sensitivity to extreme market movements. More precisely, our results suggest that dynamic copula based measures of tail dependence incorporate most essential pricing information, making other potential determinants such as Merton-type factors or linear variables measuring the systematic market evolution negligible.

Suggested Citation

  • Matthias Pelster & Johannes Vilsmeier, 2018. "The determinants of CDS spreads: evidence from the model space," Review of Derivatives Research, Springer, vol. 21(1), pages 63-118, April.
    • Handle: RePEc:kap:revdev:v:21:y:2018:i:1:d:10.1007_s11147-017-9134-6
    DOI: 10.1007/s11147-017-9134-6
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    More about this item

    Keywords

    CDS; Bayesian model averaging; Crash aversion; Tail risk; Tail dependence; Time-varying copulas;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • G01 - Financial Economics - - General - - - Financial Crises

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