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Common factors in credit defaults swap markets

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Abstract

We examine what are the common factors that determine systematic credit risk, and estimate and interpret these factors. We also compare the contributions of common factors in explaining the changes of credit default swap spreads during the pre-crisis, the crisis and the post-crisis period; there is evidence to suggest that the eigenstructures across these three sub-periods are distinct. Furthermore, we examine whether the observable economic variables are in fact the underlying latent factors and analyze the predictability in the factors that capture the time-variation of credit default swap spreads.

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Notes

  1. We appreciate the suggestion from the reviewer and the editor.

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Authors and Affiliations

  1. Department of Finance, Chung Hua University, No. 707, Sec. 2, WuFu Rd., Hsinchu, 300, Taiwan

    Cathy Yi-Hsuan Chen

  2. Ladislaus von Bortkiewicz Chair of Statistics, C.A.S.E. - Center for Applied Statistics and Economics, Humboldt-Universität zu Berlin, Unter den Linden 6, 10099, Berlin, Germany

    Wolfgang Karl Härdle

  3. Sim Kee Boon Institute for Financial Economics, Singapore Management University, 50 Stamford Road, Singapore, 178899, Singapore

    Wolfgang Karl Härdle

Authors
  1. Cathy Yi-Hsuan Chen
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  2. Wolfgang Karl Härdle
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Corresponding author

Correspondence to Cathy Yi-Hsuan Chen.

Additional information

The authors gratefully acknowledge financial support from the Deutsche Forschungsgemeinschaft through SFB 649 “Economic Risk” and IRTG 1792 “High Dimensional Non Stationary Time Series”.

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Chen, C.YH., Härdle, W.K. Common factors in credit defaults swap markets. Comput Stat 30, 845–863 (2015). https://doi.org/10.1007/s00180-015-0578-6

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  • DOI: https://doi.org/10.1007/s00180-015-0578-6

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