Home > Library > 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.
2019-09-01 10:31:00 Sunday ET

Most artificial intelligence applications cannot figure out the intricate nuances of natural language and facial recognition. These intricate nuances repres
2018-01-07 09:33:00 Sunday ET

Zuckerberg announces his major changes in Facebook's newsfeed algorithm and user authentication. Facebook now has to change the newsfeed filter to prior
2019-05-09 10:28:00 Thursday ET

President Trump ramps up 25% tariffs on $200 billion Chinese imports soon after China backtracks on the Sino-American trade agreement. U.S. trade envoy Robe
2019-05-19 19:31:00 Sunday ET

MIT professor and co-author Daron Acemoglu suggests that economic prosperity comes from high-wage job creation. Progressive tax redistribution cannot achiev
2019-02-09 08:33:00 Saturday ET

Apple provides positive forward guidance on both revenue and profit forecasts for iPhones, iPads, and MacBooks. In the Christmas 2018 festive season, MacBoo
2023-04-14 13:32:00 Friday ET

Calomiris and Haber delve into the comparative analysis of bank crises and politics in America, Britain, Canada, Mexico, and Brazil. Charles Calomiris an