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The determinants of credit default swap spreads in the presence of structural breaks and counterparty risk

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  • Kapar, B.
  • Olmo, J.

Abstract

By investigating the determinants of CDS spreads on European contracts before and after the recent crisis we observe significant differences in the explanatory power of market and firm-specific variables. Before the crisis, the underlying credit risk in the overall CDS market is sufficient to explain credit risk. During the crisis investors have a differing view on the risk of financial and non-financial contracts; whereas non-financial CDS contracts reflect the credit risk of the counterparty, financial contracts do not. Our results suggest that in case of default of financial firms, investors expect the government to intervene to alleviate credit risk of the counterparty and fears of systemic risk.

Suggested Citation

  • Kapar, B. & Olmo, J., 2011. "The determinants of credit default swap spreads in the presence of structural breaks and counterparty risk," Working Papers 11/02, Department of Economics, City University London.
    • Handle: RePEc:cty:dpaper:11/02
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    File URL: https://openaccess.city.ac.uk/id/eprint/1465/1/The_Determinants_of_Credit_Default_Swap_Spreads_in_the_Presence_of_Structural_Breaks_and_Counterparty_Risk.pdf
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    Cited by:

    1. Syed Jawad Hussain Shahzad & Safwan Mohd Nor & Nur Azura Sanusi & Ronald Ravinesh Kumar, 2018. "The Determinants of Credit Risk: Analysis of US Industry-level Indices," Global Business Review, International Management Institute, vol. 19(5), pages 1152-1165, October.
    2. Shahzad, Syed Jawad Hussain & Nor, Safwan Mohd & Kumar, Ronald Ravinesh & Mensi, Walid, 2017. "Interdependence and contagion among industry-level US credit markets: An application of wavelet and VMD based copula approaches," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 466(C), pages 310-324.
    3. Miroslav Mateev & Elena Marinova, 2019. "Relation between Credit Default Swap Spreads and Stock Prices: A Non-linear Perspective," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 43(1), pages 1-26, January.
    4. Bratis, Theodoros & Laopodis, Nikiforos T. & Kouretas, Georgios P., 2020. "Systemic risk and financial stability dynamics during the Eurozone debt crisis," Journal of Financial Stability, Elsevier, vol. 47(C).

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