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.
2024-05-27 03:23:34 Monday ET

Stock Synopsis: Life insurers emphasize profit margins over sales growth rates. We review and analyze the recent market share data in the U.S. life insur
2018-04-23 07:43:00 Monday ET

Harvard professor and former IMF chief economist Kenneth Rogoff advocates that artificial intelligence helps augment human productivity growth in the next d
2023-11-21 11:32:00 Tuesday ET

Nobel Laureate Paul Milgrom explains the U.S. incentive auction of wireless spectrum allocation from TV broadcasters to telecoms. Paul Milgrom (2019)
2018-10-15 09:33:00 Monday ET

Several pharmaceutical companies now switch their primary focus from generic prescription drugs to medical specialties such as cardiovascular medications an
2020-10-06 09:31:00 Tuesday ET

Strategic managers envision lofty purposes to enjoy incremental consistent progress over time. Allison Rimm (2015) The joy of strategy: a bu
2019-05-13 12:38:00 Monday ET

Brent crude oil prices spike to $70-$75 per barrel after the Trump administration stops waiving economic sanctions on Iranian oil exports. U.S. State Secret