Fundamentals, real-time uncertainty and CDS index spreads

Journal article


Wang, X. and Audzeyeva, A. 2023. Fundamentals, real-time uncertainty and CDS index spreads. Review of Quantitative Finance and Accounting. (61), pp. 1-33. https://doi.org/10.1007/s11156-023-01127-6
AuthorsWang, X. and Audzeyeva, A.
Abstract

The high level of economic uncertainty linked to the pace of the recovery process can persist after a crisis and has implications for the market pricing of firms’ credit risk reflected in credit default swap (CDS) spreads. This paper examines the role of key proxies for the economic state and its real-time uncertainty in determining Northern American CDX index spreads. Focusing on the recovery period following the 2007–2009 global financial crisis, we find that measures of economic output, employment, inflation, and economic uncertainty, all significantly influence CDX spreads, beyond the impact of conventional determinants. Furthermore, our results provide evidence that the sensitivity of investment-grade and high-yield CDX differs across economic aspects. Moreover, our out-of-sample predictive analysis identifies indicators and uncertainty measures with significant predictive content for quarter-ahead CDX spreads. Taken together, our findings indicate that academic modelers and practitioners employing more accurate representations of the macroeconomy in CDS modeling and analysis can improve upon the models that rely solely on the typically employed economic output variables or on broad data aggregation.

KeywordsCDS index; Credit spreads; Macroeconomic fundamentals; Macroeconomic uncertainty ; Credit spread forecasting; Economist survey nowcasts ·
Year2023
JournalReview of Quantitative Finance and Accounting
Journal citation(61), pp. 1-33
PublisherSpringer
ISSN 1573-7179
Digital Object Identifier (DOI)https://doi.org/10.1007/s11156-023-01127-6
Web address (URL)https://link.springer.com/article/10.1007/s11156-023-01127-6
Publisher's version
License
File Access Level
Open
Output statusPublished
Publication dates
Online12 Apr 2023
Publication process dates
Deposited19 Feb 2024
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https://repository.derby.ac.uk/item/q4v1w/fundamentals-real-time-uncertainty-and-cds-index-spreads

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s11156-023-01127-6.pdf
License: CC BY 4.0
File access level: Open

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