Market-Based Structural Determinants of Australian CDS Spreads
43 Pages Posted: 6 Oct 2011
Date Written: September 7, 2011
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
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