Credit derivatives and corporate default prediction

Xiaoxia Ye, Fan Yu and Ran Zhao

Journal of Banking & Finance, 2022, vol. 138, issue C

Abstract: There have been 128 defaults among U.S. CDS reference entities between 2001 and 2020. Within this sample, the five-year CDS spread is a significant predictor of corporate default in models with equity market covariates and firm attributes. This finding holds for forecast horizons up to 12 months, among financial and non-financial firms, within and without the great financial crisis, and is robust to the inclusion of corporate bond and equity options market information. A decomposition of the CDS spread into liquidity, physical default, and risk premium components shows that most of its predictive power for corporate default comes from the physical default component, both in- and out-of-sample. These results confirm the relevance of information contained in single-name CDS pricing to corporate default prediction.

Keywords: Credit default swap spread; Corporate default prediction; Physical default; Default risk premium; CDS Liquidity (search for similar items in EconPapers)
JEL-codes: G12 G13 G17 G23 G33 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:138:y:2022:i:c:s0378426622000188

DOI: 10.1016/j.jbankfin.2022.106418

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