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The determinants of CDS spreads: evidence from the model space

Matthias Pelster () and Johannes Vilsmeier ()
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Matthias Pelster: Leuphana University Lueneburg
Johannes Vilsmeier: Deutsche Bundesbank

Review of Derivatives Research, 2018, vol. 21, issue 1, 63-118

Abstract: Abstract We apply Bayesian model averaging and a frequentistic model space analysis to assess the pricing determinants of credit default swaps (CDSs). Our study focuses on the complete model space of plausible models and thus supports ultimate robustness. Using a large dataset of CDS contracts we find that CDS price dynamics can be mainly explained by factors describing firms’ sensitivity to extreme market movements. More precisely, our results suggest that dynamic copula based measures of tail dependence incorporate most essential pricing information, making other potential determinants such as Merton-type factors or linear variables measuring the systematic market evolution negligible.

Keywords: CDS; Bayesian model averaging; Crash aversion; Tail risk; Tail dependence; Time-varying copulas (search for similar items in EconPapers)
JEL-codes: G12 C11 G01 (search for similar items in EconPapers)
Date: 2018
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