The Role of a Changing Market Environment for Credit Default Swap Pricing
This paper investigates the impact of a changing market Environment on the pricing of CDS spreads written on debt from EURO STOXX 50 rms. A Panel Smooth Transition Regression reveals that parameter estimates of standard CDS pricing variables are time-varying depending on current values of a set of variables such as the ECB's systemic stress composite index, the Sentix index for the current and future economic situation, and the VStoxx. These variables describe the market's transition between dierent regimes thereby reecting the impact of substantial swings in agents' risk perception on CDS spreads. Overall, our results confirm the importance of nonlinearities in the pricing of risk derivatives during tranquil and turbulent times.