TY - JOUR

T1 - The determinants of CDS spreads

T2 - evidence from the model space

AU - Pelster, Matthias Uwe

AU - Vilsmeier, Johannes

PY - 2018/4/1

Y1 - 2018/4/1

N2 - 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.

AB - 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.

KW - Management studies

KW - CDS

KW - Bayesian Model averaging

KW - Crash aversion

KW - Tail Risk

KW - Tail dependence

KW - Time-varying copulas

UR - http://www.scopus.com/inward/record.url?scp=85021260592&partnerID=8YFLogxK

U2 - 10.1007/s11147-017-9134-6

DO - 10.1007/s11147-017-9134-6

M3 - Journal articles

VL - 21

SP - 63

EP - 118

JO - Review of Derivatives Research

JF - Review of Derivatives Research

SN - 1380-6645

IS - 1

ER -