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Macroeconomic Conditions and Credit Default Swap Spread Changes

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  • Tong Suk Kim
  • Jae Won Park
  • Yuen Jung Park

Abstract

This study investigates the importance of the business cycle in explaining credit default swap spread changes by utilizing ex ante proxies. It uses portfolio regression and finds the structural variables, including the business cycle, explain approximately 65% of the spread differences. Furthermore, the business cycle variable enhances explanatory power more during the pre‐ and post‐crisis periods than during the crisis period and shows greater improvement for investment‐grade than for non‐investment‐grade firms. These results suggest that macroeconomic conditions play a critical role when the underlying asset value is likely to have greater distance from the default barrier. © 2017 Wiley Periodicals, Inc. Jrl Fut Mark 37:766–802, 2017

Suggested Citation

  • Tong Suk Kim & Jae Won Park & Yuen Jung Park, 2017. "Macroeconomic Conditions and Credit Default Swap Spread Changes," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 37(8), pages 766-802, August.
    • Handle: RePEc:wly:jfutmk:v:37:y:2017:i:8:p:766-802
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    Cited by:

    1. Adrian Fernandez‐Perez & Raquel López, 2023. "The effect of macroeconomic news announcements on the implied volatility of commodities: The role of survey releases," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(11), pages 1499-1530, November.
    2. Heger, Julia & Min, Aleksey & Zagst, Rudi, 2024. "Analyzing credit spread changes using explainable artificial intelligence," International Review of Financial Analysis, Elsevier, vol. 94(C).
    3. Alena Audzeyeva & Xu Wang, 2023. "Fundamentals, real-time uncertainty and CDS index spreads," Review of Quantitative Finance and Accounting, Springer, vol. 61(1), pages 1-33, July.
    4. Apergis, Nicholas & Danuletiu, Dan & Xu, Bing, 2022. "CDS spreads and COVID-19 pandemic," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 76(C).
    5. Xing, Kai & Luo, Dan & Liu, Lanlan, 2023. "Macroeconomic conditions, corporate default, and default clustering," Economic Modelling, Elsevier, vol. 118(C).
    6. Jung Park, Yuen & Kutan, Ali M. & Ryu, Doojin, 2019. "The impacts of overseas market shocks on the CDS-option basis," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 622-636.

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