Click here to download

Estimating credit default swap spreads using accounting data, market quotes and credit ratings: the European Banks Case
Journal Title: FINANCIAL REPORTING 
Author/s: Enrico Laghi, Michele Di Marcantonio, Eugenio D'Amico 
Year:  2014 Issue: 2-3-4 Language: English 
Pages:  23 Pg. 59-81 FullText PDF:  309 KB
DOI:  10.3280/FR2014-002003
(DOI is like a bar code for intellectual property: to have more infomation:  clicca qui   and here 


The aim of this paper is to define a model for estimating the theoretical Credit Default Swap spread of European banks considering firms’ accounting data, market quotes, official ratings and macroeconomic variables. We detect a significant log-linear relation between Credit Default Swaps spreads and four explanatory variables determined on the basis of the stock price, the financial structure, the equity composition, the incidence of the reserve for loan losses on total loans, the official ratings and macroeconomic indicators of the country of domicile of each company. The empirical results show that for the period from 2008 to 2013 the model has a high statistical significance and a remarkable explanatory power. Our main contribution to the existing literature is the exploration of new determinants of banks’ credit risk and the provision of new evidence on the determinants of banks’ default risk in the crisis and post-crisis European context. Furthermore, we define a practical model for estimating Credit Default Swap spreads of banks suitable for professional use.
Keywords: Credit default swaps, credit risk, default risk determinants; structural models

  1. Acharya V.V., Drechsler I. and Schnabl P. (2011), A pyrrhic victory?-bank bailouts and sovereign credit risk (No. w17136). National Bureau of Economic Research,, 10.2139/ssrn.1865465DOI: 10.2139/ssrn.1865465
  2. Almer T., Heidorn T. and Schmaltz C. (2008), The dynamics of short-and longterm CDS-spreads of banks (No. 95). Working paper series, Frankfurt School of Finance & Management.
  3. Amato J.D. (2005), Risk Aversion and Risk Premia in the CDS Market, BIS Quarterly Review, December, pp. 55-68.
  4. Annaert J., De Ceuster M., Van Roy P. and Vespro C. (2013), What determines euro area bank CDS spreads?, Journal of International Money and Finance, 32, pp. 444-461,, 10.1016/j.jimonfin.2012.05.029DOI: 10.1016/j.jimonfin.2012.05.029
  5. Aunon-Nerin D., Cossin D., Hricko T. and Huang Z. (2002), Exploring for the Determinants of Credit Risk in Credit Default Swap Transaction Data: Is Fixed-Income Markets’ Information Sufficient to Evaluate Credit Risk?, Research Paper, FAME No. 65,, 10.2139/ssrn.375563DOI: 10.2139/ssrn.375563
  6. Benkert C. (2004), Explaining Credit Default Swap Premia, Journal of Future Markets, 24 (1), pp. 71-92,, 10.1002/fut.10112DOI: 10.1002/fut.10112
  7. Blanco R., Brennan S. and Marsh I.W. (2005), An Empirical Analysis of the Dynamic Relation between Investment-Grade Bonds and Credit Default Swaps, The Journal of Finance, 60 (5), pp. 2255-2281,, 10.1111/j.1540-6261.2005.00798.xDOI: 10.1111/j.1540-6261.2005.00798.x
  8. Cao C., Yu F. and Zhong Z. (2010), The information Content of Option-Implied Volatility for Credit Default Swap Valuation, Journal of Financial Markets, 13 (3), pp. 321-343,, 10.1016/j.finmar.2010.01.002.5027.CausseP.E.(2011),Theperformanceofbanksduringthefinancialcrisis.(Paris:HEC)DOI: 10.1016/j.finmar.2010.01.002.5027.CausseP.E.(2011),Theperformanceofbanksduringthefinancialcrisis.(Paris:HEC)
  9. Chen R.-R., Cheng X., Fabozzi F.J. and Liu B. (2008). An Explicit, Multi-Factor Credit Default Swap Pricing Model with Correlated Factors, Journal of Financial and Quantitative Analysis, 43 (1), pp. 123-160,, 10.1017/S0022109000002775DOI: 10.1017/S0022109000002775
  10. Chiaramonte L. and Casu B. (2013), The determinants of bank CDS spreads: evidence from the financial crisis, The European Journal of Finance, 19 (9), pp. 861-887,, 10.1080/1351847X.2011.636832DOI: 10.1080/1351847X.2011.636832
  11. Collin‐Dufresne P., Goldstein R.S. and Martin J.S. (2001), The determinants of credit spread changes, The Journal of Finance, 56 (6), pp. 2177-2207,, 10.1111/0022-1082.00402DOI: 10.1111/0022-1082.00402
  12. Damodaran A. (last access March 2013), http://pages.stern.nyu.edu/~adamodar/,section Updated Data/Data Sets/Risk Premiums of Other Markets, document “1/12”.
  13. Das S.R., Hanouna P. and Sarin A. (2009), Accounting-Based Versus Market-Based Cross-Sectional Models of CDS Spreads, Journal of Banking & Finance,
  14. 33 (4), pp. 719-730,, 10.1016/j.jbankfin.2008.11.003DOI: 10.1016/j.jbankfin.2008.11.003
  15. Delianedis G. and Geske R.L. (2001), The Components of Corporate Credit Spreads Default, Recovery, Tax, Jumps, Liquidity, and Market Factors. Working Paper, UCLA Anderson No. 22-01.
  16. Demchuk A. and Gibson R. (2006), Stock Market Performance and the Term Structure of Credit Spreads, Journal of Financial and Quantitative Analysis, 41 (4), pp. 863-887,, 10.1017/S0022109000002672DOI: 10.1017/S0022109000002672
  17. Duffee G.R. (1999), Estimating the Price of Default Risk, Review of Financial Studies, 12 (1), pp. 197-226,, 10.1093/rfs/12.1.197DOI: 10.1093/rfs/12.1.197
  18. Easton P.D. (1998), Discussion of revalued financial, tangible, and intangible assets: Association with share prices and non-market-based value estimates, Journal of Accounting Research, 36, pp. 235-247,, 10.2307/2491315DOI: 10.2307/2491315
  19. Ericsson J., Jacobs K. and Oviedo R. (2009), The Determinants of Credit Default Swap Premia, Journal of Financial and Quantitative Analysis, 44 (1), pp. 109-132,, 10.1017/S0022109009090061DOI: 10.1017/S0022109009090061
  20. Ericsson J., Reneby J. and Wang H. (2005), Can Structural Models Price Default Risk? New Evidence from Bond and Credit Derivative Markets. Working paper, McGill University,, 10.2139/ssrn.637042DOI: 10.2139/ssrn.637042
  21. Farnsworth H. and Li T. (2007), The Dynamics of Credit Spreads and Ratings Migrations, Journal of Financial and Quantitative Analysis, 42 (3), pp. 595-620,, 10.1017/S0022109000004117DOI: 10.1017/S0022109000004117
  22. Houweling P. and Vorst T. (2005), Pricing Default Swaps: Empirical Evidence, Journal of International Money and Finance, 24 (8), pp. 1200-1225,, 10.1016/j.jimonfin.2005.08.009DOI: 10.1016/j.jimonfin.2005.08.009
  23. Hull J. (2008), Options, Futures, and Other Derivatives. (Pearson).
  24. Hull J., White A. (2000), Valuing Credit Default Swaps I: No Counterparty Default Risk, The Journal of Derivatives, 8 (1), pp. 29-40,, 10.3905/jod.2000.319115.HullJ.andWhiteA.(2001),ValuingCreditDefaultSwapsII:ModelingDefaultCorrelations,TheJournalofDerivatives,8(3),pp.12-21,doiDOI: 10.3905/jod.2000.319115.HullJ.andWhiteA.(2001),ValuingCreditDefaultSwapsII:ModelingDefaultCorrelations,TheJournalofDerivatives,8(3),pp.12-21,doi
  25. 10.3905/jod.2001.319153.
  26. Hull J., Predescu M. and White A. (2004), The Relationship Between Credit Default Swap Spreads, Bond Yields, and Credit Rating Announcements, Journal of Banking and Finance, 28 (11), pp. 2789-2811,, 10.1016/j.jbankfin.2004.06.010DOI: 10.1016/j.jbankfin.2004.06.010
  27. Jaramillo L. and Tejada C.M. (2011), Sovereign credit ratings and spreads in emerging markets: does investment grade matter? International Monetary Fund.
  28. Kalsyte Z. and Verikas A. (2013). A novel approach to exploring company’s financial soundness: Investor’s perspective. Expert Systems with Applications, 40 (13), pp. 5085-5092.
  29. Longstaff F., Mithal S. and Neis E. (2005), Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit Default Swap Market, The Journal of Finance, 60 (5), pp. 2213-2253,, 10.1111/j.1540-6261.2005.00797.xDOI: 10.1111/j.1540-6261.2005.00797.x
  30. Madan D. and Unal H. (2000), A Two-Factor Hazard Rate Model for Pricing Risky Debt and theTerm Structure of Credit Spreads, Journal of Financial and Quantitative Analysis, 35 (1), pp. 43-65,, 10.2307/2676238DOI: 10.2307/2676238
  31. Micu M., Remolona E. and Wooldridge P. (2004), The price impact of rating announcements: evidence from the credit default swap market, BIS Quarterly Review, pp. 55-64.
  32. O’Kane D. and Turnbull S. (2003), The Valuation of Credit Default Swaps, Leheman Brothers – Fixed Income Quantitative Credit Research.
  33. Packer F. and Zhu H. (2005), Contractual Terms and CDS Pricing, BIS Quarterly Review, pp. 89-100.
  34. Pan J. and Singleton K.J. (2008), Default and Recovery Implicit in the Term Structure of Sovereign CDS Spreads, The Journal of Finance, 63 (5), pp. 2345-2384,, 10.1111/jofi.2008.63.issue-5DOI: 10.1111/jofi.2008.63.issue-5
  35. Pires P., Pereira J.P. and Martins L.F. (2010), The Complete Picture of Credit Default Swap Spreads – A Quantile Regression Approach. Working paper, ISCTE Business School,, 10.2139/ssrn.1125265DOI: 10.2139/ssrn.1125265
  36. Schneider P., Sögner L. and Veža T. (2010), The Economic Role of Jumps and Recovery Rates in the Market for Corporate Default Risk, Journal of Financial and Quantitative Analysis, 45 (6), pp. 1517-1547,, 10.1017/S0022109010000554DOI: 10.1017/S0022109010000554
  37. Wu L. and Carr P. (2009), Stock Options and Credit Default Swaps: A Joint Framework for Valuation and Estimation, Journal of Financial Econometrics, 8 (4), pp. 409-449,, 10.2139/ssrn.748005DOI: 10.2139/ssrn.748005
  38. Zhang B.Y., Zhou H. and Zhu H. (2009), Explaining Credit Default Swap Spreads with the Equity Volatility and Jump Risks of Individual Firm, Review of Financial Studies, 22 (12), pp. 5099-5131,, 10.1093/rfs/hhp004DOI: 10.1093/rfs/hhp004
  39. Zhu H. (2006), An Empirical Comparison of Credit Spreads between the Bond Market and the Credit Default Swap Market, Journal of Financial Services Research, 29 (3), pp. 211-235,, 10.1007/s10693-006-7626-xDOI: 10.1007/s10693-006-7626-x

Enrico Laghi, Michele Di Marcantonio, Eugenio D'Amico, in "FINANCIAL REPORTING" 2-3-4/2014, pp. 59-81, DOI:10.3280/FR2014-002003

   

FrancoAngeli is a member of Publishers International Linking Association a not for profit orgasnization wich runs the CrossRef service, enabing links to and from online scholarly content