A Tree Model for Pricing Credit Default Swaps with Equity, Market and Default Risk

2009 ◽  
Author(s):  
Ruxing Xu ◽  
Shenghong Li
Keyword(s):  
Default Risk ◽  
Credit Default Swaps ◽  
Equity Market ◽  
Tree Model ◽  
Credit Default

scholarly journals The Impact of Earnings on the Pricing of Credit Default Swaps

2009 ◽  
Vol 84 (5) ◽  
pp. 1363-1394 ◽  
Author(s):  
Jeffrey L. Callen ◽  
Joshua Livnat ◽  
Dan Segal
Keyword(s):  
Default Risk ◽  
Credit Default Swap ◽  
Credit Default Swaps ◽  
Cash Flows ◽  
Earnings Surprises ◽  
Credit Default ◽  
Percent Increase ◽  
Default Swap ◽  
Highly Correlated ◽  
The Impact

ABSTRACT: This study evaluates the impact of earnings on credit risk in the Credit Default Swap (CDS) market using levels, changes, and event study analyses. We find that earnings (cash flows, accruals) of reference firms are negatively and significantly correlated with the level of CDS premia, consistent with earnings (cash flows, accruals) conveying information about default risk. Based on the changes analysis, a 1 percent increase in ROA decreases CDS rates significantly by about 5 percent. We also find that (1) CDS premia are more highly correlated with below-median earnings than with above-median earnings and (2) CDS premia are more highly correlated with earnings of low-rated firms than with earnings of high-rated firms. Evidence indicates further that short-window earnings surprises are negatively and significantly correlated with CDS premia changes in the three-day window surrounding the preliminary earnings announcement, although the impact is concentrated in the shorter maturities.

scholarly journals Are Credit Default Swaps a Sideshow? Evidence That Information Flows from Equity to CDS Markets

2015 ◽  
Vol 50 (3) ◽  
pp. 543-567 ◽  
Author(s):  
Jens Hilscher ◽  
Joshua M. Pollet ◽  
Mungo Wilson
Keyword(s):  
Credit Default Swap ◽  
Credit Default Swaps ◽  
Equity Market ◽  
Equity Returns ◽  
Information Flows ◽  
Market Selection ◽  
Credit Default ◽  
Investor Inattention ◽  
Informed Traders ◽  
Default Swap

AbstractThis article provides evidence that equity returns lead credit protection returns at daily and weekly frequencies, whereas credit protection returns do not lead equity returns. Our results indicate that informed traders are primarily active in the equity market rather than the credit default swap (CDS) market. These findings are consistent with standard theories of market selection by informed traders in which market selection is determined partially by transaction costs. We also find that credit protection returns respond more quickly during salient news events (earnings announcements) compared to days with similar equity returns and turnover. This evidence provides support for explanations related to investor inattention.

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