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Market Conditions Default Risk And Credit Spreads
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Book Synopsis Market Conditions, Default Risk and Credit Spreads by : Dragon Yongjun Tang
Download or read book Market Conditions, Default Risk and Credit Spreads written by Dragon Yongjun Tang and published by . This book was released on 2010 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study empirically examines the impact of the interaction between market and default risk on corporate credit spreads. Using credit default swap (CDS) spreads, we find that average credit spreads decrease in GDP growth rate, but increase in GDP growth volatility and jump risk in the equity market. At the market level, investor sentiment is the most important determinant of credit spreads. At the firm level, credit spreads generally rise with cash flow volatility and beta, with the effect of cash flow beta varying with market conditions. We identify implied volatility as the most significant determinant of default risk among firm-level characteristics. Overall, a major portion of individual credit spreads is accounted for by firm-level determinants of default risk, while macroeconomic variables are directly responsible for a lesser portion.
Book Synopsis An Empirical Comparison of Credit Spreads Between the Bond Market and the Credit Default Swap Market by : Haibin Zhu
Download or read book An Empirical Comparison of Credit Spreads Between the Bond Market and the Credit Default Swap Market written by Haibin Zhu and published by . This book was released on 2004 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis The Fundamental Determinants of Credit Default Risk for European Large Complex Financial Institutions by : Jiri Podpiera
Download or read book The Fundamental Determinants of Credit Default Risk for European Large Complex Financial Institutions written by Jiri Podpiera and published by International Monetary Fund. This book was released on 2010-06-01 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper attempts to identify the fundamental variables that drive the credit default swaps during the initial phase of distress in selected European Large Complex Financial Institutions (LCFIs). It uses yearly data over 2004 - 08 for 29 European LCFIs. The results from a dynamic panel data estimator show that LCFIs’ business models, earnings potential, and economic uncertainty (represented by market expectations about the future risks of a particular LCFI and market views on prospects for economic growth) are among the most significant determinants of credit risk. The findings of the paper are broadly consistent with those of the literature on bank failure, where the determinants of the latter include the entire CAMELS structure - that is, Capital Adequacy, Asset Quality, Management Quality, Earnings Potential, Liquidity, and Sensitivity to Market Risk. By establishing a link between the financial and market fundamentals of LCFIs and their CDS spreads, the paper offers a potential tool for fundamentals-based vulnerability and early warning system for LCFIs.
Book Synopsis The negative basis - Credit Default Swap contracts and credit risk during the financial crisis by : Matthias Schnare
Download or read book The negative basis - Credit Default Swap contracts and credit risk during the financial crisis written by Matthias Schnare and published by GRIN Verlag. This book was released on 2011-10-19 with total page 95 pages. Available in PDF, EPUB and Kindle. Book excerpt: Master's Thesis from the year 2010 in the subject Economics - Finance, grade: 5.0 (Schweiz), University of Zurich (Wirtschaftswissenschaften), language: English, abstract: The current developments in the credit or bond markets, influenced by the financial crisis and the economic downturn, revive a discussion about credit derivatives as an instrument of speculation and one cause or determinant of the financial crisis. Currently, CDS are used to speculate against the solvency of the different governments. Critics look at CDS contracts as Overthecounter (OTC) instruments that are not regulated and as bilateral contracts which can have a big influence on the financial position of market participants and on the real credit markets. CDS contracts are mainly instruments for investors to insure against a default of the debtor. For the seller of the CDS they are a possibility to participate in risks he perhaps could not have taken on the bond markets otherwise. These contracts separate the default risk of the debtor from the market conditions, e.g. the market interest rates. They make it possible to only trade the credit risk of a company or a country. Therefore, they can be instruments to proof the bond values and indicators for the real credit risk of the underlying. The discussion about CDS contracts is mostly a discussion including many prejudices and it deals with aspects from different topics which cannot be mixed. Therefore, a clear picture of advantages and disadvantages and especially values and risks of CDS is difficult to be found in the current public discussion and economic newspaper articles. A further phenomenon is that bond markets and CDS markets have lost their connection in the financial crisis. So the credit risk on both markets is valued differently: the prices on the two markets differed so much that market participants used these arbitrage possibilities to earn credit riskfree money for themselves and their customers It can be traded with a simple combination of the underlying bond and the fitting CDS contract. One of the causes of the basis can be the different liquidity level in the two separated markets. For the development of the basis during the crisis it is important to ask how big the changes are compared to the situation before the financial crisis and also how important the credit rating or the industry of the reference entity is.. The price difference, if the CDS price is lower than the credit risk priced by the bond of the same reference entity, is negative basiscalled
Book Synopsis Bond Market Turnover and Credit Spread Changes by : Viorel Roscovan
Download or read book Bond Market Turnover and Credit Spread Changes written by Viorel Roscovan and published by . This book was released on 2013 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent research on default risk has shown that most of the variation in credit spreads is driven by a common yet unidentifiable factor. I find that bond turnover explains up to 11% of this variation. Using the implications of an intertemporal capital asset pricing model, I construct a bond hedging portfolio from TRACE transactions data and relate its return to changes in credit spreads. In theory, this portfolio captures the dynamic risk of the economy and, hence, hedges the risk of changes in market conditions. My findings are as follows. First, credit spreads relate asymmetrically to the return on the bond hedging portfolio. When market conditions are risky, the return on the bond hedging portfolio is positive and credit spreads increase significantly. During unchanged or less risky market conditions, the return on the bond hedging portfolio is small or negative, and credit spreads are less sensitive. Second, on average, credit spreads do not relate to a similar hedging portfolio constructed from equity volume data. The return on the stock hedging portfolio, however, captures some variation in credit spreads for riskier bond classes. Third, in contrast to the results for equity markets, where stock returns and volume are weakly related, this paper finds a strong link between volume and credit spreads in corporate bond markets.
Book Synopsis Estimating the systematic component of credit spreads by : Sebastian Wilde
Download or read book Estimating the systematic component of credit spreads written by Sebastian Wilde and published by GRIN Verlag. This book was released on 2022-08-31 with total page 79 pages. Available in PDF, EPUB and Kindle. Book excerpt: Master's Thesis from the year 2022 in the subject Economics - Finance, grade: 1,7, University of Hagen (Fakultät für Wirtschaftswissenschaft, Lehrstuhl für Bank- und Finanzwirtschaft), language: English, abstract: Corporate bond credit spreads are much larger than historical default rates, which leads to an unexplained gap between the default premium component and total credit spread. This gap is referred to as the "credit spread puzzle" in the literature and has driven the discussion of the components of credit spreads in the past decades. The size of each component affects the decision of whether to purchase a particular class of bonds; this underlines its importance in risk management, portfolio management, and valuation. The first goal of the thesis is to provide a comprehensive review of the current state of research on how to decompose credit spreads and estimate their parts. Second, in an empirical study, the systematic risk in current EUR-denominated credit spreads is estimated and compared to the results of Elton et al. (2001). Furthermore, I analyze the regime-dependence of credit spreads for different cross-sections, as systematic risk has proven important in crisis periods. Finally, implications for the calculation of debt beta are derived as in business valuations it is possible to use a debt beta if the debt of the valuation object is subject to a systematic risk that leads to a signifcant risk premium demanded by debt providers. I show that the systematic part of the credit spread for observed EUR-denominated bond spreads from 2009 to 2021 can be assumed higher than in the US bond market, is regime-dependent and would have direct implications on the calculation and relevance of a debt beta for business valuations.
Book Synopsis Credit Default Swaps by : Christopher L. Culp
Download or read book Credit Default Swaps written by Christopher L. Culp and published by Springer. This book was released on 2018-07-12 with total page 356 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book, unique in its composition, reviews the academic empirical literature on how CDSs actually work in practice, including during distressed times of market crises. It also discusses the mechanics of single-name and index CDSs, the theoretical costs and benefits of CDSs, as well as comprehensively summarizes the empirical evidence on important aspects of these instruments of risk transfer. Full-time academics, researchers at financial institutions, and students will benefit from the dispassionate and comprehensive summary of the academic literature; they can read this book instead of identifying, collecting, and reading the hundreds of academic articles on the important subject of credit risk transfer using derivatives and benefit from the synthesis of the literature provided.
Book Synopsis Macro Factors in the Term Structure of Credit Spreads by : Jeffery D. Amato
Download or read book Macro Factors in the Term Structure of Credit Spreads written by Jeffery D. Amato and published by . This book was released on 2006 with total page 72 pages. Available in PDF, EPUB and Kindle. Book excerpt: We estimate arbitrage-free term structure models of US Treasury yields and spreads on BBB and B rated corporate bonds in a doubly-stochastic intensity-based framework. A novel feature of our analysis is the inclusion of macroeconomic variables -- indicators of real activity, inflation and financial conditions -- as well as latent factors, as drivers of term structure dynamics. Our results point to three key roles played by macro factors in the term structure of spreads: they have a significant impact on the level, and particularly the slope, of the curves; they are largely responsible for variation in the prices of systematic risk; and speculative grade spreads exhibit greater sensitivity to macro shocks than high grade spreads. In addition to estimating risk-neutral default intensities, we provide estimates of physical default intensities using data on Moody's KMV EDFs as a forward--looking proxy for default risk. We find that the real and financial activity indicators, along with filtered estimates of the latent factors from our term structure model, explain a large portion of the variation in EDFs across time. Furthermore, measures of the price of default event risk implied by estimates of physical and risk-neutral intensities indicate that compensation for default event risk is countercyclical, varies widely across the cycle, and is higher on average and more variable for higher-rated bonds.
Book Synopsis Default Risk Explains Main Part of Corporate Credit Spreads by : Vladimir L. Philosophov
Download or read book Default Risk Explains Main Part of Corporate Credit Spreads written by Vladimir L. Philosophov and published by . This book was released on 2010 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper describes model of a new type for valuation of risky bonds and loans that we call Bayesian Multi-Period (BMP) model. BMP is neither structural model nor reduced form and not a Merton-type model at all. BMP proceeds from concept of a risky bond (loan) value as Net Present Value (NPV) of a cash flow, generated by a bond. For a defaultable bond NPV is random value, and BMP identifies ldquo;fairrdquo; price of a risky bond as its mean NPV. Statistical properties of a (random) difference between NPV of a risky bond and NPV of risk-free bond with the same terms of issuance characterize riskness of a bond. BMP supposes that a borrower (e.g. a firm) generally has several debt issues (bonds, loans) simultaneously - with different terms of issuance (interest rates, maturity horizons, payment schedules etc.) and calculates risk characteristics for each debt issue separately. It considers exact contractual cash flow schedule of each specific debt issue and combines it with probabilities of a borrower's default at all stages of cash flow process. Default prognosis in turn accounts for joint influence of all outstanding debt of a firm.BMP uses multi-period default prognosis of Bayesian type based on indices of borrower's current financial position with accounting for predictive abilities of repayment schedule of a firm's long-term debt. This type prognosis can additionally incorporate other predictive variables like familiar market factor - ldquo;distance to defaultrdquo;. BMP calculates ldquo;fairrdquo; interest rates for newly issued risky corporate bonds, ldquo;fairrdquo; prices and ldquo;fairrdquo; yield to maturity for risky bonds at intermediate moments of bond's life. We compare them with observed market prices, rates and spreads.The model explains on average about 70% of observed interest rates, credit spreads and market prices of a bond. That is much more, than usually explain Merton-type models.The paper discusses relation between multi-period default probabilities and credit ratings.
Book Synopsis Credit Default Swap Spreads and Variance Risk Premia (VRP) by : Hao Wang
Download or read book Credit Default Swap Spreads and Variance Risk Premia (VRP) written by Hao Wang and published by DIANE Publishing. This book was released on 2011-04 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Investigating the Sources of Default Risk by : Gurdip Bakshi
Download or read book Investigating the Sources of Default Risk written by Gurdip Bakshi and published by . This book was released on 2001 with total page 66 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Credit Risk written by Niklas Wagner and published by CRC Press. This book was released on 2008-05-28 with total page 600 pages. Available in PDF, EPUB and Kindle. Book excerpt: Featuring contributions from leading international academics and practitioners, Credit Risk: Models, Derivatives, and Management illustrates how a risk management system can be implemented through an understanding of portfolio credit risks, a set of suitable models, and the derivation of reliable empirical results. Divided into six sectio
Book Synopsis From Default Probabilities to Credit Spreads by : Stefan Denzler
Download or read book From Default Probabilities to Credit Spreads written by Stefan Denzler and published by . This book was released on 2013 with total page 18 pages. Available in PDF, EPUB and Kindle. Book excerpt: Credit risk models like Moody's KMV are now well established in the market and give bond managers reliable estimates of default probabilities for individual firms. Until now it has been hard to relate those probabilities to the actual credit spreads observed on the market for corporate bonds. Inspired by the existence of scaling laws in financial markets by Dacorogna et al. (2001) and Di Matteo et al. (2005) deviating from the Gaussian behavior, we develop a model that quantitatively links those default probabilities to credit spreads (market prices). The main input quantities to this study are merely industry yield data of different times to maturity and expected default frequencies (EDFs) of Moody's KMV.The empirical results of this paper clearly indicate that the model can be used to calculate approximate credit spreads (market prices) from EDFs, independent of the time to maturity and the industry sector under consideration. Moreover, the model is effective in an out-of-sample setting, it produces consistent results on the European bond marketwhere data are scarce and can be adequately used to approximate credit spreads on the corporate level.
Book Synopsis Explaining the Level of Credit Spreads by : Martijn Cremers
Download or read book Explaining the Level of Credit Spreads written by Martijn Cremers and published by . This book was released on 2005 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: Prices of equity index put options contain information on the price of systematic downward jump risk. We use a structural jump-diffusion firm value model to assess the level of credit spreads that is generated by option-implied jump risk premia. In our compound option pricing model, an equity index option is an option on a portfolio of call options on the underlying firm values. We calibrate the model parameters to historical information on default risk, the equity premium and equity return distribution, and S & P 500 index option prices. Our results show that a model without jumps fails to fit the equity return distribution and option prices, and generates a low out-of-sample prediction for credit spreads. Adding jumps and jump risk premia improves the fit of the model in terms of equity and option characteristics considerably and brings predicted credit spread levels much closer to observed levels.
Book Synopsis Credit Default Swaps by : Marti Subrahmanyam
Download or read book Credit Default Swaps written by Marti Subrahmanyam and published by Now Publishers. This book was released on 2014-12-19 with total page 150 pages. Available in PDF, EPUB and Kindle. Book excerpt: Credit Default Swaps: A Survey is the most comprehensive review of all major research domains involving credit default swaps (CDS). CDS have been growing in importance in the global financial markets. However, their role has been hotly debated, in industry and academia, particularly since the credit crisis of 2007-2009. The authors review the extant literature on CDS that has accumulated over the past two decades and divide the survey into seven topics after providing a broad overview in the introduction. The second section traces the historical development of CDS markets and provides an introduction to CDS contract definitions and conventions. The third section discusses the pricing of CDS, from the perspective of no-arbitrage principles, structural, and reduced-form credit risk models. It also summarizes the literature on the determinants of CDS spreads, with a focus on the role of fundamental credit risk factors, liquidity and counterparty risk. The fourth section discusses how the development of the CDS market has affected the characteristics of the bond and equity markets, with an emphasis on market efficiency, price discovery, information flow, and liquidity. Attention is also paid to the CDS-bond basis, the wedge between the pricing of the CDS and its reference bond, and the mispricing between the CDS and the equity market. The fifth section examines the effect of CDS trading on firms' credit and bankruptcy risk, and how it affects corporate financial policy, including bond issuance, capital structure, liquidity management, and corporate governance. The sixth section analyzes how CDS impact the economic incentives of financial intermediaries. The seventh section reviews the growing literature on sovereign CDS and highlights the major differences between the sovereign and corporate CDS markets. The eighth section discusses CDS indices, especially the role of synthetic CDS index products backed by residential mortgage-backed securities during the financial crisis. The authors close with our suggestions for promising future research directions on CDS contracts and markets.
Book Synopsis The Term Structure of Credit Spreads and the Economic Activity by :
Download or read book The Term Structure of Credit Spreads and the Economic Activity written by and published by . This book was released on with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We estimate arbitrage-free term structure models of US Treasury yields and spreads on BBB and B-rated corporate bonds in a doubly- stochastic intensity-based framework. A novel feature of our analysis is the inclusion of macroeconomic variables - indicators of real activity, inflation and financial conditions - as well as latent factors, as drivers of term structure dynamics. Our results point to three key roles played by macro factors in the term structure of spreads: they have a significant impact on the level, and particularly the slope, of the curves; they are largely responsible for variation in the prices of systematic risk; and speculative grade spreads exhibit greater sensitivity to macro shocks than high grade spreads. In addition to estimating risk-neutral default intensities, we provide estimates of physical default intensities using data on Moody's KMV EDFs"!as a forward-looking proxy for default risk. We find that the real and financial activity indicators, along with filtered estimates of the latent factors from our term structure model, explain a large portion of the variation in EDFs"!across time. Furthermore, measures of the price of default event risk implied by estimates of physical and risk-neutral intensities indicate that compensation for default event risk is countercyclical, varies widely across the cycle, and is higher on average and more variable for higher- rated bonds.
Book Synopsis Explaining Credit Default Swap Spreads with Equity Volatility and Jump Risks of Individual Firms by : Yibin Zhang
Download or read book Explaining Credit Default Swap Spreads with Equity Volatility and Jump Risks of Individual Firms written by Yibin Zhang and published by . This book was released on 2005 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt:
