Market-Based Structural Determinants of Australian CDS Spreads

Abstract

We analyse the determinants of Australian corporate credit default swap (CDS) spreads. In addition to structural determinants, consisting of equity returns, equity volatility and risk-free interest rates, we show that CDS spreads are impacted by the uncertainty of asset values as proxied by the dispersion in equity analysts’ price targets. Market-based variables including the changes in the S&P/ASX200 index return and stock-level option-implied volatility also contain valuable information about spreads. The analysis of spread determinants also shows that during the financial crisis equity-based market variables featured more prominently in the pricing of CDS spreads than credit ratings.

Keywords: credit default swaps, structural models, asset value uncertainty, financial crisis

JEL Classification: G12, G13