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Credit default swap spreads: market conditions, firm performance, and the impact of the 2007–2009 financial crisis

Xiaoqing Fu (), Matthew C. Li () and Philip Molyneux ()
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Xiaoqing Fu: University of Macau
Matthew C. Li: Royal Holloway University of London

Empirical Economics, 2021, vol. 60, issue 5, No 3, 2203-2225

Abstract: Abstract We employ a multi-factor analysis from both a firm-specific (microeconomic) and market-specific (macroeconomic) perspective to examine the determinants of credit default swap (CDS) spreads in the USA, the UK and Japan between 2005 and 2012. We investigate both aggregate (cross-country) and individual market data so that a comparative analysis can be performed. Our results reveal that (i) in general, Tobin’s Q, stock market returns, and the risk-free interest rate possess significant explanatory power for CDS spreads; (ii) the relationship identified is found to exist in all three markets with varying strength; (iii) despite the added information flow, the 2007–2009 financial crisis did not shorten the persistence (adjustment speed) of CDS spreads to variations in our explanatory variables; and (iv) degree of firm leverage appears to have a significant influence on CDS spreads. These results are robust to various model specifications. Synthesizing our overall results, we maintain that to reap the benefits of using CDSs as a risk management tool, greater attention should be devoted to supporting a stable market (economic and financial) environment. This paper contributes to elucidate how firm performance and macroeconomic conditions play a significant role in explaining CDS spreads.

Keywords: Credit default swap spread; Structural models; Firm performance; Macroeconomic conditions; Financial crisis (search for similar items in EconPapers)
JEL-codes: G10 G15 G32 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s00181-020-01852-0

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