The asymmetric effect of equity volatility on credit default swap spreads
Hwang Hee Lee and
Journal of Banking & Finance, 2019, vol. 98, issue C, 125-136
This study examines whether good and bad news have any asymmetric effect on credit default swap (CDS) spreads by decomposing equity volatility into continuous variation and signed jumps depending on the information. We find that negative jumps affect CDS spreads more significantly and economically than positive jumps even after controlling for other variables related to credit risk. This finding suggests that negative jumps in equity prices would be a credit risk factor of individual firms. Moreover, the effects of jumps on CDS spreads are more pronounced for firms with high leverage ratios and small sizes. Finally, we show that our findings remain intact even when considering the global financial crisis period and different CDS maturity terms.
Keywords: Credit default swap spread; Volatility; Realized semivariance; Signed jump (search for similar items in EconPapers)
JEL-codes: G12 G13 C58 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:98:y:2019:i:c:p:125-136
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