Premium
The Empirical Determinants of Credit Default Swap Spreads: a Quantile Regression Approach
Author(s) -
Pires Pedro,
Pereira João Pedro,
Martins Luís Filipe
Publication year - 2015
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1468-036x.2013.12029.x
Subject(s) - econometrics , quantile regression , credit default swap , economics , leverage (statistics) , volatility (finance) , credit risk , quantile , financial economics , actuarial science , statistics , mathematics
We study the empirical determinants of Credit Default Swap (CDS) spreads through quantile regressions. In addition to traditional variables, such as implied volatility, put skew, historical stock return, leverage, profitability, and ratings, the results indicate that CDS premiums are strongly determined by CDS illiquidity costs, measured by absolute bid‐ask spreads. The quantile regression approach reveals that high‐risk firms are more sensitive to changes in the explanatory variables that low‐risk firms. Furthermore, the goodness‐of‐fit of the model increases with CDS premiums, which is consistent with the credit spread puzzle.