Market conditions, default risk and credit spreads

Dragon Yongjun Tang and Hong Yan

Journal of Banking & Finance, 2010, vol. 34, issue 4, 743-753

Abstract: This study empirically examines the impact of the interaction between market and default risk on corporate credit spreads. Using credit default swap (CDS) spreads, we find that average credit spreads decrease in GDP growth rate, but increase in GDP growth volatility and jump risk in the equity market. At the market level, investor sentiment is the most important determinant of credit spreads. At the firm level, credit spreads generally rise with cash flow volatility and beta, with the effect of cash flow beta varying with market conditions. We identify implied volatility as the most significant determinant of default risk among firm-level characteristics. Overall, a major portion of individual credit spreads is accounted for by firm-level determinants of default risk, while macroeconomic variables are directly responsible for a lesser portion.

Keywords: Credit; risk; Credit; default; swaps; Credit; spreads; Market; conditions (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (155)

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Working Paper: Market conditions, default risk and credit spreads (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:34:y:2010:i:4:p:743-753

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