Credit Derivatives and Corporate Default Prediction



Ye, Xiaoxia ORCID: 0000-0002-5024-6186, Yu, Fan and Zhao, Ran ORCID: 0000-0001-8502-0024
(2022) Credit Derivatives and Corporate Default Prediction. Journal of Banking & Finance, 138. p. 106418.

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Abstract

There have been 128 defaults among U.S. CDS reference entities between 2001 and 2020. Within this sample, the five-year CDS spread is a significant predictor of corporate default in models with equity market covariates and firm attributes. This finding holds for forecast horizons up to 12 months, among financial and non-financial firms, within and without the great financial crisis, and is robust to the inclusion of corporate bond and equity options market information. A decomposition of the CDS spread into liquidity, physical default, and risk premium components shows that most of its predictive power for corporate default comes from the physical default component, both in- and out-of-sample. These results confirm the relevance of information contained in single-name CDS pricing to corporate default prediction.

Item Type: Article
Uncontrolled Keywords: Credit default swap spread, Corporate default prediction, Physical default, Default risk premium, CDS Liquidity, Credit default swap spread, Corporate default prediction, Physical default, Default risk premium, CDS Liquidity
Divisions: Faculty of Humanities and Social Sciences > School of Management
Depositing User: Symplectic Admin
Date Deposited: 24 Jan 2022 08:30
Last Modified: 21 Jul 2023 01:30
DOI: 10.1016/j.jbankfin.2022.106418
Related URLs:
URI: https://livrepository.liverpool.ac.uk/id/eprint/3147432