Dynamic Interactions Between Interest-Rate and Credit Risk: Theory and Evidence on the Credit Default Swap Term Structure-super-*

Ren-Raw Chen, Xiaolin Cheng and Liuren Wu

Review of Finance, 2013, vol. 17, issue 1, 403-441

Abstract: This paper examines the interaction between default risk and interest-rate risk in determining the term structure of credit default swap spreads at different industry sectors and credit-rating classes. The paper starts with a parsimonious three-factor interest-rate dynamic term structure and projects the credit spread at each industry sector and rating class to these interest-rate factors while also allowing the projection residual dynamics to depend on the level of the interest-rate factors. Estimation shows that credit risk exhibits intricate dynamic interactions with the interest-rate factors. Copyright 2013, Oxford University Press.

Date: 2013
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