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

B. Kapar and Jose Olmo

Working Papers from Department of Economics, City University London

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.

Keywords: co-integration; counterparty risk; credit default swaps; credit risk; iTraxx index (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (4)

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