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Valuation of systematic risk in the cross-section of credit default swap spreads

Arndt Claußen, Sebastian Löhr, Daniel Rösch and Harald Scheule

The Quarterly Review of Economics and Finance, 2017, vol. 64, issue C, 183-195

Abstract: We analyze the pricing of systematic risk factors in credit default swap (CDS) contracts in a two-stage empirical framework. Firstly we estimate contract-specific sensitivities (betas) to several systematic risk factors by time-series regressions using quoted CDS spreads of 339 U.S. entities from January 2004 to December 2010. Secondly, we show that these contract-specific sensitivities are cross-sectionally priced in CDS spreads after controlling for individual risk factors. We find that the credit market climate, the Cross-market Correlation, and the market volatility explain CDS spread changes and that their corresponding sensitivities (betas) are particularly priced in the cross-section. Our basic risk factors explain about 83% (90%) of the CDS spreads prior to (during) the crisis.

Keywords: Credit default swaps; Cross-section; Systematic risk (search for similar items in EconPapers)
JEL-codes: G1 G2 (search for similar items in EconPapers)
Date: 2017
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