The Effects of Industry Specific and Local Economic Factors on Credit Default Swap Spreads: Evidence from REITs
Qing Bai () and
Lu Zhu ()
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Qing Bai: Dickinson College
Lu Zhu: California State University
Journal of Financial Services Research, 2018, vol. 54, issue 3, 293-321
Abstract Credit Default Swap (CDS) spreads on Real Estate Investment Trust (REITs) have been extremely volatile since the onset of 2008 financial crisis. To have a better understanding of it, we examine the CDS spreads on REITs for both pre- and post-crisis with a particular focus on the effects of geographic concentration and local economic conditions on CDS spreads on REITs. We document that, above and beyond the factors of commonality suggested in the literature, a REIT’s geographic concentration has strong explanatory power for the behaviors of CDS spreads on REITs and the magnitude of this impact depends on the state of the local economy. Our findings suggest there is a potential local-to-private risk transfer through which market participants incorporate their expectations about the future economic health of the region into asset prices. This channel leads to significant co-movement between CDS spreads on REITs and the performance of local economy.
Keywords: Credit default swap; REITs; Geographic concentration; Economic sectors (search for similar items in EconPapers)
JEL-codes: G12 G23 R12 R23 (search for similar items in EconPapers)
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