Audzeyeva, A and Wang, X (2023) Fundamentals, real-time uncertainty and CDS index spreads. Review of Quantitative Finance and Accounting. ISSN 0924-865X

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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.

Item Type: Article
Additional Information: This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/.
Subjects: H Social Sciences > HA Statistics
H Social Sciences > HB Economic Theory
H Social Sciences > HC Economic History and Conditions
H Social Sciences > HF Commerce
H Social Sciences > HG Finance
Divisions: Faculty of Humanities and Social Sciences > Keele Business School
Depositing User: Symplectic
Date Deposited: 30 Jan 2023 11:46
Last Modified: 14 Apr 2023 10:38
URI: https://eprints.keele.ac.uk/id/eprint/11860

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