The Empirical Determinants of Credit Default Swap Spreads: a Quantile Regression Approach

Authors


  • We are grateful for the helpful comments and suggestions of Rodrigo Alfaro, Aaron Brown, Miguel Ferreira, Lidija Lovreta, Lars Norden, Eduardo Ortas, Pedro Santa-Clara, Oliver Woll, two anonymous referees, and seminar participants at the 2008 International Conference on Price, Liquidity, and Credit Risks at the University of Konstanz (Germany), 2011 FMA European Conference, and European Financial Management 2011 Conference. We thank Til Schuermann and Peter Tufano for featuring an extended abstract of this paper in the GARP Risk Review, 43 (2008). Financial support from FCT Fundação para a Ciência e Tecnologia under project PTDC/EGE-GES/119274/2010 is gratefully acknowledged.

Abstract

We study the empirical determinants of Credit Default Swap (CDS) spreads through quantile regressions. In addition to traditional variables, such as implied volatility, put skew, historical stock return, leverage, profitability, and ratings, the results indicate that CDS premiums are strongly determined by CDS illiquidity costs, measured by absolute bid-ask spreads. The quantile regression approach reveals that high-risk firms are more sensitive to changes in the explanatory variables that low-risk firms. Furthermore, the goodness-of-fit of the model increases with CDS premiums, which is consistent with the credit spread puzzle.

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