Library

Home > Library > Credit default swaps and interest rate innovations

Credit default swaps and interest rate innovations

Author Andy Yeh Alpha

This research article empirically shows the mysterious and inexorable nexus between credit default swap spreads and interest rate surprises.

Description:

This paper examines the empirical relationship between credit risk and interest rate risk. We use the credit default swap (CDS) spread as our measure of credit risk. Also, we control for the variation in the fair-value spread that combines multiple sources of default risk, including the market price of risk (Sharpe ratio), the loss given default (LGD), and the expected default frequency (EDF). After taking into account the fair-value spread, a liquidity risk factor, and several proxies for the general state of the macroeconomy, we find that the interest rate surprise factor serves as a robust determinant of CDS spread gyrations in both the full sample and most subsamples organized by industry type and credit rating status. Furthermore, we empirically find that the swap interest rate variables convey material information about CDS spread movements above and beyond the Treasury interest rate variables in the vast majority of 2SLS regressions. These empirical results have important implications for the parameterization of interest rate dynamics in the Monte Carlo simulation of economic capital for a typical bank's credit portfolio.

 

Blog+More

President Trump refreshes his public image through his presidential address to Congress.

Daisy Harvey

2017-02-01 14:41:00 Wednesday ET

President Trump refreshes his public image through his presidential address to Congress.

President Trump refreshes his public image through his presidential address to Congress with numerous ambitious economic policies in order to make America g

+See More

U.S. trading partners such as the European Union, Canada, China, Japan, Mexico, and Russia voice their concern at the WTO.

James Campbell

2018-07-05 13:40:00 Thursday ET

U.S. trading partners such as the European Union, Canada, China, Japan, Mexico, and Russia voice their concern at the WTO.

U.S. trading partners such as the European Union, Canada, China, Japan, Mexico, and Russia voice their concern at the World Trade Organization (WTO) in ligh

+See More

Americans continue to keep their financial New Year resolutions.

Jonah Whanau

2019-01-15 13:35:00 Tuesday ET

Americans continue to keep their financial New Year resolutions.

Americans continue to keep their financial New Year resolutions. First, Americans should save more money. Everyone needs a budget to ensure that key paychec

+See More

Facebook reaches a $5 billion settlement with the Federal Trade Commission over Cambridge Analytica user privacy violations.

Monica McNeil

2019-08-12 07:30:00 Monday ET

Facebook reaches a $5 billion settlement with the Federal Trade Commission over Cambridge Analytica user privacy violations.

Facebook reaches a $5 billion settlement with the Federal Trade Commission over Cambridge Analytica user privacy violations. The Federal Trade Commission (F

+See More

Saudi Aramco aims to initiate its fresh IPO in December 2019.

Charlene Vos

2019-12-13 09:32:00 Friday ET

Saudi Aramco aims to initiate its fresh IPO in December 2019.

Saudi Aramco aims to initiate its fresh IPO in December 2019. Several investment banks indicate to the Saudi government that most investors may value the mi

+See More

Tech unicorns blitzscale business niches for better scale economies from Uber and Lyft to Pinterest, Slack, and Zoom.

Dan Rochefort

2019-05-03 11:29:00 Friday ET

Tech unicorns blitzscale business niches for better scale economies from Uber and Lyft to Pinterest, Slack, and Zoom.

Key tech unicorns blitzscale business niches for better scale economies from Uber and Lyft to Pinterest, Slack, and Zoom. LinkedIn cofounder and serial entr

+See More