Journal Article

The Role of a Changing Market Environment for Credit Default Swap Pricing

Authors

  • Julian S. Leppin
  • Stefan Reitz
Publication Date

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 di?erent 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.

Info

JEL Classification
C33, G13, G15

Key Words

  • CDS Spreads
  • financial crisis
  • Panel Smooth Transition

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