The role of a changing market environment for credit default swap pricing

Arbeitspapier

This paper investigates the impact of a changing market environment on the pricing of CDS spreads written on debt from EURO STOXX 50 firms. A Panel Smooth Transition Regression reveals that parameter estimates of standard CDS fundamentals are time-varying depending on current values of a set of variables such as ECB's systemic stress composite index, the Sentix index for current and future economics situation, and the VStoxx. These variables describe the market's transition between different regimens thereby reflecting 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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Kiel Working Paper ; No. 1946

Classification and Topics

• Classification: Wirtschaft ; Contingent Pricing; Futures Pricing; option pricing ; International Financial Markets ; Multiple or Simultaneous Equation Models: Panel Data Models; Spatio-temporal Models
• Subject: CDS spreads ; Financial Crisis ; Panel Smooth Transition

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Leppin, Julian S. ; Reitz, Stefan
• Event: Veröffentlichung
• (who): Kiel Institute for the World Economy (IfW)
• (where): Kiel
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/100077
• Last update: 10.03.2025, 11:42 AM CET