The Determinants of Credit Default Swap Premia

Jan Ericsson, Kris Jacobs and Oviedo-Helfenberger, Rodolfo
Additional contact information
Kris Jacobs: McGill University
Oviedo-Helfenberger, Rodolfo: McGill University

No 32, SIFR Research Report Series from Institute for Financial Research

Abstract: Using a new dataset of bid and offer quotes for credit default swaps, we investigate the relationship between theoretical determinants of default risk and actual market premia using linear regression. These theoretical determinants are firm leverage, volatility and the riskless interest rate. We find that estimated coefficients for these variables are consistent with theory and that the estimates are highly significant both statistically and economically. The explanatory power of the theoretical variables for levels of default swap premia is approximately 60%. The explanatory power for the differences in the premia is approximately 23%. Volatility and leverage by themselves also have substantial explanatory power for credit default swap premia. A principal component analysis of the residuals and the premia shows that there is only weak evidence for a residual common factor and also suggests that the theoretical variables explain a significant amount of the variation in the data. We therefore conclude that leverage, volatility and the riskfree rate are important determinants of credit default swap premia, as predicted by theory.

Keywords: Credit default swap; Credit risk; Structural model; Leverage; Volatility (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-fin and nep-fmk
Date: Written
View list of references View citations in EconPapers

Downloads: (external link)
http://www.sifr.org/PDFs/sifr-wp32.pdf (application/pdf)

Related works:
Working Paper: The Determinants of Credit Default Swap Premia (2004)
Journal Article: The Determinants of Credit Default Swap Premia (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:hhs:sifrwp:0032

Access Statistics for this paper

More papers in SIFR Research Report Series from Institute for Financial Research
Address: Institute for Financial Research Drottninggatan 89, SE-113 60 Stockholm, Sweden
Contact information at EDIRC.
Series data maintained by Anki Helmer ().