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The Role of a Changing Market Environment for Credit Default Swap Pricing
Author(s) -
Leppin Julian S.,
Reitz Stefan
Publication year - 2016
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1543
Subject(s) - credit default swap , economics , index (typography) , credit derivative , itraxx , credit risk , econometrics , financial economics , debt , credit default swap index , swap (finance) , panel data , monetary economics , credit valuation adjustment , actuarial science , macroeconomics , finance , world wide web , computer science , credit reference
This paper investigates the impact of a changing market environment on the pricing of credit default swaps (CDS) spreads written on debt from EURO STOXX 50 firms. A panel smooth transition regression reveals that parameter estimates of standard CDS‐pricing variables are time varying depending on current values of a set of variables such as the European Central Bank's systemic stress composite index, the Sentix index for the current and future economic situation and the VStoxx. These variables describe the market's transition between different regimes, thereby reflecting the impact of substantial swings in agents' risk perception on CDS spreads. Overall, our results confirm the importance of nonlinearities in the pricing of risk derivatives during tranquil and turbulent times. Copyright © 2016 John Wiley & Sons, Ltd.