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

Ivanka Trump softens her father's brash and combative image with a social agenda toward female empowerment.

Fiona Sydney

2017-06-09 06:37:00 Friday ET

Ivanka Trump softens her father's brash and combative image with a social agenda toward female empowerment.

To complement President Trump's pro-business economic policies such as low taxation, new infrastructure, greater job creation, and technological in

+See More

Michel De Vroey delves into the global history of macroeconomic theories from real business cycles to persistent monetary effects.

Laura Hermes

2023-02-07 08:26:00 Tuesday ET

Michel De Vroey delves into the global history of macroeconomic theories from real business cycles to persistent monetary effects.

Michel De Vroey delves into the global history of macroeconomic theories from real business cycles to persistent monetary effects. Michel De Vroey (2016)

+See More

The Biden Inflation Reduction Act is central to modern world capitalism.

Andy Yeh Alpha

2023-02-28 11:30:00 Tuesday ET

The Biden Inflation Reduction Act is central to modern world capitalism.

The Biden Inflation Reduction Act is central to modern world capitalism. As of 2022-2023, global inflation has gradually declined from the peak of 9.8% d

+See More

Agile business firms beat the odds by building faster institutional reflexes to anticipate plausible economic scenarios.

Fiona Sydney

2020-09-03 10:26:00 Thursday ET

Agile business firms beat the odds by building faster institutional reflexes to anticipate plausible economic scenarios.

Agile business firms beat the odds by building faster institutional reflexes to anticipate plausible economic scenarios. Christopher Worley, Thomas Willi

+See More

Paul Morland suggests that demographic changes lead to modern economic growth in the current world.

Laura Hermes

2023-10-28 12:29:00 Saturday ET

Paul Morland suggests that demographic changes lead to modern economic growth in the current world.

Paul Morland suggests that demographic changes lead to modern economic growth in the current world. Paul Morland (2019)   The human tide: how

+See More

Our proprietary alpha investment model outperforms most stock market indices such as S&P 500, Dow Jones, and Nasdaq.

Andy Yeh Alpha

2019-02-01 15:35:00 Friday ET

Our proprietary alpha investment model outperforms most stock market indices such as S&P 500, Dow Jones, and Nasdaq.

Our proprietary alpha investment model outperforms the major stock market benchmarks such as S&P 500, MSCI, Dow Jones, and Nasdaq. We implem

+See More