Explaining Credit Default Swap Spreads with the Equity Volatility and Jump Risks of Individual Firms
A structural model with stochastic volatility and jumps implies specific relationships between observed equity returns and credit spreads. This paper explores such effects in the credit default swap (CDS) market. We use a novel approach to identify the realized jumps of individual equities from high frequency data. Our empirical results suggest that volatility risk alone predicts 50 percent of the variation in CDS spreads, while jump risk alone forecasts 19 percent. After controlling for credit ratings, macroeconomic conditions, and firms’ balance sheet information, we can explain 77 percent of the total variation. Moreover, the pricing effects of volatility and jump measures vary consistently across investment-grade and high-yield entities. The estimated nonlinear effects of volatility and jumps are in line with the model-implied relationships between equity returns and credit spreads.
Structural Model Stochastic Volatility Jumps Credit Spread Credit Default Swap Nonlinear Effect High-Frequency Data
Benjamin Yibin Zhang Hao Zhou Haibin Zhu
Fitch Ratings, One State Street Plaza, New York, NY 10004, USA Federal Reserve Board, Mail Stop 91, Washington, DC 20551, USA Bank for International Settlements, Centralbahnplatz 2, 4002 Basel, Switzerland
国际会议
昆明
英文
1-42
2005-07-05（万方平台首次上网日期，不代表论文的发表时间）