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The Determinants of Credit Default Swap Premia

Published online by Cambridge University Press:  01 February 2009

Jan Ericsson ,
Kris Jacobs  and
Rodolfo Oviedo
Jan Ericsson
Affiliation:
Desautels Faculty of Management, McGill University, 1001 Sherbrooke Street West, Montreal, Quebec, H3A 1G5, Canada. [email protected]
Kris Jacobs
Affiliation:
Desautels Faculty of Management, McGill University, 1001 Sherbrooke Street West, Montreal, Quebec, H3A 1G5, Canada. [email protected]
Rodolfo Oviedo
Affiliation:
Facultad de Ciencias Empresariales, Universidad Austral, Paraguay 1950, Rosario, Santa Fe, S2000FZF, Argentina. Ericsson is also a research affiliate of SIFR, Jacobs is affiliated with CIRANO and CIREQ, and Oviedo holds the ROFEX Chair of Derivatives at Universidad Austral. [email protected]
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Abstract

Variables that in theory determine credit spreads have limited explanatory power in existing empirical work on corporate bond data. We investigate the linear relationship between theoretical determinants of default risk and default swap spreads. We find that estimated coefficients for a minimal set of theoretical determinants of default risk are consistent with theory and are significant statistically and economically. Volatility and leverage have substantial explanatory power in univariate and multivariate regressions. A principal component analysis of residuals and spreads indicates limited evidence for a residual common factor, confirming that the theoretical variables explain a significant amount of the variation in the data.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 1 , February 2009 , pp. 109 - 132
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

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