The characteristics of the non-financial and the financial sector credit risk determinants: An empirical study from the CDS index market.
Honkanen, Lassi (2011)
Honkanen, Lassi
2011
Kuvaus
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Tiivistelmä
This thesis studies the determinants of credit spread by studying credit default swap (CDS) index spread changes. The purpose is to compare the differences between the financial and the non-financial sectors. The sample is divided into two sub-periods. The differences between the financial and the non-financial sector are studied by comparing the determinants of credit spread on these both sub-periods individually.
The determinants of credit spread have been a subject of many studies, but only few of them have used CDS index spread changes as proxy for credit risk. This thesis uses two sector Itraxx Europe CDS indices, Financials and Non-financials as a proxy for credit risk. The Itraxx Europe main index is consisted from 125 most liquid credit default swap contracts in the Europe and it is adjusted every half a year to contain the most liquid CDS contracts in the European markets.
The determinants used in this thesis are selected on the basis of the previous studies. The sector specific stock return and historical volatility variables are adjusted to consist of the same companies as the CDS index to improve their explanatory power. The other variables are market implied volatility, TED spread, risk free rate and lagged dependent variable. This thesis examines significance of these determinants and studies the difference of stock market return variable between the financial and the non-financial sectors. In addition the changes of selected determinants between the two observation periods are studied.
This thesis finds that the stock return, implied volatility and lagged dependent variable are significant determinants of credit spread. TED spread, historical volatility and risk free rate are not significant in any regression. The comparison of stock return variable between both sector indices is suggesting that the slopes are different on the period before the crisis and similar during the crisis. The comparison of the determinants between the two observation period results that stock returns and lagged dependent variable didn’t show any change between the two sub-periods. On the other hand, significant structural change in the volatility and interest rate variables were observed.
The determinants of credit spread have been a subject of many studies, but only few of them have used CDS index spread changes as proxy for credit risk. This thesis uses two sector Itraxx Europe CDS indices, Financials and Non-financials as a proxy for credit risk. The Itraxx Europe main index is consisted from 125 most liquid credit default swap contracts in the Europe and it is adjusted every half a year to contain the most liquid CDS contracts in the European markets.
The determinants used in this thesis are selected on the basis of the previous studies. The sector specific stock return and historical volatility variables are adjusted to consist of the same companies as the CDS index to improve their explanatory power. The other variables are market implied volatility, TED spread, risk free rate and lagged dependent variable. This thesis examines significance of these determinants and studies the difference of stock market return variable between the financial and the non-financial sectors. In addition the changes of selected determinants between the two observation periods are studied.
This thesis finds that the stock return, implied volatility and lagged dependent variable are significant determinants of credit spread. TED spread, historical volatility and risk free rate are not significant in any regression. The comparison of stock return variable between both sector indices is suggesting that the slopes are different on the period before the crisis and similar during the crisis. The comparison of the determinants between the two observation period results that stock returns and lagged dependent variable didn’t show any change between the two sub-periods. On the other hand, significant structural change in the volatility and interest rate variables were observed.