Measuring Abnormal Credit Default Swap Spreads

Doumet, Markus ; Andres, Christian ; Betzer, André

Document Type: Conference presentation
Year of publication: 2013
Conference title: FMA European Meeting
Location of the conference venue: Luxemburg
Date of the conference: 14.6.2013
Publication language: English
Institution: Business School > ABWL u. Finanzierung (Theissen 2009-)
Subject: 330 Economics
Classification: JEL: G14,
Keywords (English): CDS spread, event study , Brown-Warner simulation
Abstract: This paper examines the size and power of test statistics designed to detect abnormal changes in credit risk as measured by credit default swap (CDS) spreads. In a spirit similar to that of Brown and Warner (1980, 1985) and Bessembinder et al. (2009), we follow a simulation approach to examine the statistical properties of normal and abnormal CDS spreads and assess the performance of normal return models and test statistics. Using daily CDS data, we find that parametric test statistics are generally inferior to non-parametric tests, with the rank test performing best. Some of the classical normal return models, such as the market model, are found to be poorly specified. A CDS factor model based on factors identified in the empirical literature is generally well specified and more powerful in detecting abnormal performance. If factor information is not available, a simple mean-adjusted approach should be used. Finally, we examine performance in the presence of event-induced variance increases and bootstrapped p-values. Our inferences hold for US and European CDS data and are not affected by reference entity credit quality.

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