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Investor Sentiment and Credit Default Swap Spreads During the Global Financial Crisis
Author(s) -
Lee Jeehye,
Kim Sol,
Park Yuen Jung
Publication year - 2017
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21828
Subject(s) - credit default swap , economics , financial crisis , proxy (statistics) , volatility (finance) , leverage (statistics) , equity (law) , itraxx , explanatory power , stock (firearms) , financial economics , monetary economics , credit default swap index , econometrics , credit risk , finance , credit valuation adjustment , mechanical engineering , philosophy , epistemology , machine learning , computer science , political science , law , credit reference , macroeconomics , engineering
This paper examines whether investor sentiment can predict credit default swap (CDS) spread changes. Among several proxies for investor sentiment, change in equity put–call ratio performs best in predicting variation in CDS spread changes in both firm‐ and portfolio‐level regressions; in particular, the explanatory power of this proxy is greater for non‐investment‐grade firms than for investment‐grade firms. More importantly, sentiment may be a critical factor in determining CDS spread changes during the global financial crisis and may best explain the differences in CDS spread in the group of firms whose leverage ratio and stock volatility are highest. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:660–688, 2017