The Direct Relevance of Accounting Information for Credit Default Swap Pricing

Authors

  • George Batta

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    1. The author is Assistant Professor of Economics-Accounting at Claremont McKenna College. This paper is based in part on the author's doctoral thesis at Harvard Business School. He would like to thank members of his thesis committee, Paul Healy, Krishna Palepu and George Chacko, for their invaluable advice and support. This paper has also benefitted from seminar participants’ comments at Claremont McKenna College, Harvard Business School, the University of Southern California, NERA Economic Consulting, Charles River Associates, Analysis Group, Moody's KMV, and the 2007 FARS Mid-year Meeting. The author would also like to thank one of the editors, Peter F. Pope, as well as an anonymous referee for their highly insightful comments and suggestions.
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George Batta, Assistant Professor of Economics-Accounting, Claremont McKenna College, Robert Day School of Economics and Finance, 500 E. 9th St., Claremont, CA 91711,USA. e-mail: gbatta@cmc.edu

Abstract

Abstract:  This paper examines the direct relevance of accounting information for credit default swap (CDS) pricing. Prior research on the impact of accounting information for CDS pricing has neglected to include either the output of theoretical CDS pricing models or credit ratings, both of which should impound credit relevant accounting information. Both in- and out-of-sample testing results suggest that accounting information's explanatory power for CDS prices is significantly diminished when this additional information is included in regression models. Empirical findings suggest a larger indirect role for accounting information in pricing CDS’, which play an important role in credit risk price discovery.

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