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.
2018-06-25 12:43:00 Monday ET

Apple and Samsung are the archrivals for the title of the world's top smart phone maker. The recent patent lawsuit settlement between Apple and Samsung
2020-10-13 08:27:00 Tuesday ET

Agile lean enterprises strive to design radical business models to remain competitive in the face of nimble startups and megatrends. Carsten Linz, Gunter
2025-05-29 08:25:28 Thursday ET

Serial venture capitalist Ben Horowitz describes many hard truths, lessons, and insights from his entrepreneurial journey of running LoudCloud from a Silico
2021-02-02 14:24:00 Tuesday ET

Our proprietary alpha investment model outperforms the major stock market benchmarks such as S&P 500, MSCI, Dow Jones, and Nasdaq. We implement
2024-04-30 09:30:00 Tuesday ET

With clean and green energy resources and electric vehicles, the global auto industry now navigates at a newer and faster pace. Both BYD and Tesla have
2019-06-29 17:30:00 Saturday ET

Nobel Laureate Joseph Stiglitz proposes the primary economic priorities in lieu of neoliberalism. Neoliberalism includes lower taxation, deregulation, socia