Spread Risk Premia in Corporate Credit Default Swap Markets
Author | : Oliver Entrop |
Publisher | : |
Total Pages | : 44 |
Release | : 2016 |
ISBN-10 | : OCLC:1306278862 |
ISBN-13 | : |
Rating | : 4/5 (62 Downloads) |
Download or read book Spread Risk Premia in Corporate Credit Default Swap Markets written by Oliver Entrop and published by . This book was released on 2016 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: The spread risk premium component of credit default swap (CDS) spreads represents a compensation demanded by protection sellers for future changes in CDS spreads caused by unpredictable fluctuations in the reference entity's risk-neutral default intensity. This paper defines and estimates a measure of the spread risk premium component in CDS spreads of a sample of European investment-grade firms by using a stochastic intensity credit model. Our results show that, on average, investors demand a positive premium for such mark-to-market risks. After controlling for CDS market conditions, like liquidity and supply/demand effects, a panel data analysis of the estimated spread risk premia reveals among other things a significant positive impact of event risk captured by the overall stock market volatility and of investors' appetite for exposure to credit markets as reflected by the overall CDS market.