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What drives corporate default risk premia?: evidence from the CDS market

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What drives corporate default risk premia? evidence from the CDS market. / Diaz, Antonio; Groba, Jonatan; Serrano, Pedro.

In: Journal of International Money and Finance, Vol. 37, 10.2013, p. 529-563.

Research output: Contribution to Journal/MagazineJournal articlepeer-review

Harvard

Diaz, A, Groba, J & Serrano, P 2013, 'What drives corporate default risk premia? evidence from the CDS market', Journal of International Money and Finance, vol. 37, pp. 529-563. https://doi.org/10.1016/j.jimonfin.2013.07.003

APA

Diaz, A., Groba, J., & Serrano, P. (2013). What drives corporate default risk premia? evidence from the CDS market. Journal of International Money and Finance, 37, 529-563. https://doi.org/10.1016/j.jimonfin.2013.07.003

Vancouver

Diaz A, Groba J, Serrano P. What drives corporate default risk premia? evidence from the CDS market. Journal of International Money and Finance. 2013 Oct;37:529-563. Epub 2013 Jul 30. doi: 10.1016/j.jimonfin.2013.07.003

Author

Diaz, Antonio ; Groba, Jonatan ; Serrano, Pedro. / What drives corporate default risk premia? evidence from the CDS market. In: Journal of International Money and Finance. 2013 ; Vol. 37. pp. 529-563.

Bibtex

@article{c23abd90cfe04505be5f839ee8eca5b7,
title = "What drives corporate default risk premia?: evidence from the CDS market",
abstract = "This article studies the economic factors behind corporate default risk premia in Europe during the period 2006-2010. We employ information embedded in Credit Default Swap (CDS) contracts to quantify expected excess returns from the underlying bonds in market-wide default circumstances. We disentangle the compensation to investors for unexpected changes in the creditworthiness of the bond issuer from their remuneration for the risk that the bond{\textquoteright}s price will drop in the event of default. Our results show that the risk premia associated with systematic factors influencing default arrivals represent approximately 40% of total CDS spread (on median). These premia also exhibit a strong source of commonality; a single principal component explains approximately 88% of their joint variability. This factor significantly covaries with aggregate illiquidity and sovereign risk variables. Empirical evidence suggests a public-to-private risk transfer between sovereign credit spread and corporate risk premia. Finally, the compensation in the event of default is approximately 14 basis points of the total CDS spread, and a significant amount of jump-at-default risk may not be diversifiable.",
keywords = "Credit default swap, Distress risk premium, Expected default frequency, Jump-at-default risk premium",
author = "Antonio Diaz and Jonatan Groba and Pedro Serrano",
year = "2013",
month = oct,
doi = "10.1016/j.jimonfin.2013.07.003",
language = "English",
volume = "37",
pages = "529--563",
journal = "Journal of International Money and Finance",
issn = "0261-5606",
publisher = "Elsevier BV",

}

RIS

TY - JOUR

T1 - What drives corporate default risk premia?

T2 - evidence from the CDS market

AU - Diaz, Antonio

AU - Groba, Jonatan

AU - Serrano, Pedro

PY - 2013/10

Y1 - 2013/10

N2 - This article studies the economic factors behind corporate default risk premia in Europe during the period 2006-2010. We employ information embedded in Credit Default Swap (CDS) contracts to quantify expected excess returns from the underlying bonds in market-wide default circumstances. We disentangle the compensation to investors for unexpected changes in the creditworthiness of the bond issuer from their remuneration for the risk that the bond’s price will drop in the event of default. Our results show that the risk premia associated with systematic factors influencing default arrivals represent approximately 40% of total CDS spread (on median). These premia also exhibit a strong source of commonality; a single principal component explains approximately 88% of their joint variability. This factor significantly covaries with aggregate illiquidity and sovereign risk variables. Empirical evidence suggests a public-to-private risk transfer between sovereign credit spread and corporate risk premia. Finally, the compensation in the event of default is approximately 14 basis points of the total CDS spread, and a significant amount of jump-at-default risk may not be diversifiable.

AB - This article studies the economic factors behind corporate default risk premia in Europe during the period 2006-2010. We employ information embedded in Credit Default Swap (CDS) contracts to quantify expected excess returns from the underlying bonds in market-wide default circumstances. We disentangle the compensation to investors for unexpected changes in the creditworthiness of the bond issuer from their remuneration for the risk that the bond’s price will drop in the event of default. Our results show that the risk premia associated with systematic factors influencing default arrivals represent approximately 40% of total CDS spread (on median). These premia also exhibit a strong source of commonality; a single principal component explains approximately 88% of their joint variability. This factor significantly covaries with aggregate illiquidity and sovereign risk variables. Empirical evidence suggests a public-to-private risk transfer between sovereign credit spread and corporate risk premia. Finally, the compensation in the event of default is approximately 14 basis points of the total CDS spread, and a significant amount of jump-at-default risk may not be diversifiable.

KW - Credit default swap

KW - Distress risk premium

KW - Expected default frequency

KW - Jump-at-default risk premium

U2 - 10.1016/j.jimonfin.2013.07.003

DO - 10.1016/j.jimonfin.2013.07.003

M3 - Journal article

VL - 37

SP - 529

EP - 563

JO - Journal of International Money and Finance

JF - Journal of International Money and Finance

SN - 0261-5606

ER -