Faculty
Social Science
Supervisor Name
Jorge Cruz Lopez
Keywords
Credit default swaps, Leverage, Credit risk
Description
The research investigates the effect of leverage on the pricing of Credit Default Swaps (CDS) and focuses on key sectors of the economy: Technology, Financials, Consumer Staples and Industrials. CDS are financial instruments that were developed a few decades ago and have become more widely used in financial markets for hedging credit exposures. Given their prevalence in financial markets, it is important to understand how CDS spreads change when reference entities modify their capital structure.
In the regression analysis, the level of CDS spread is used as dependent variable, and the standardized relative leverage is used as independent variable. My hypothesis is that the leverage has a positive effect on CDS Spreads. I have four main data source: Bloomberg (CBIN pricing source), WRDS (CRSP, COMPUSTAT), FRED | St. Louis Fed (www.stlouisfed.org), and Yahoo Finance.
The results suggest that the increase of corporate leverage has a positive effect on CDS spreads. If the sample size is small, the models may produce high variance estimates with opposite signs.
Acknowledgements
Thank you to Dr. Jorge Cruz Lopez for his guidance and support. Also thank you to the coordinators and funders of the USRI program for giving me this opportunity.
Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial 4.0 License
Document Type
Poster
Included in
The Effect of Leverage on Credit Default Swaps
The research investigates the effect of leverage on the pricing of Credit Default Swaps (CDS) and focuses on key sectors of the economy: Technology, Financials, Consumer Staples and Industrials. CDS are financial instruments that were developed a few decades ago and have become more widely used in financial markets for hedging credit exposures. Given their prevalence in financial markets, it is important to understand how CDS spreads change when reference entities modify their capital structure.
In the regression analysis, the level of CDS spread is used as dependent variable, and the standardized relative leverage is used as independent variable. My hypothesis is that the leverage has a positive effect on CDS Spreads. I have four main data source: Bloomberg (CBIN pricing source), WRDS (CRSP, COMPUSTAT), FRED | St. Louis Fed (www.stlouisfed.org), and Yahoo Finance.
The results suggest that the increase of corporate leverage has a positive effect on CDS spreads. If the sample size is small, the models may produce high variance estimates with opposite signs.