An Empirical Study on the Relationship between Systematic Risk and CDS Spreads in the Korean Market

Kim, Jung Mu; Park, Yuen Jung

Korean Journal of Financial Studies 2015;44(2):313-342.
Published online April 30, 2015.

Jung Mu Kim, Yuen Jung Park

신용부도스왑 스프레드에 대한 체계적 위험의 영향

김정무, 박윤정

Abstract

We study the cross-sectional relationship between systematic risk proportion and CDS spreads using CDS data on 18 Korean firms. The sample period covers from 2001 to 2012. Controlling for the total risk, we find that firms with higher systematic risk proportion have lower CDS spreads and this result is statistically and economically significant. Specifically, we find evidence that one percent increase in systematic risk proportion induces approximately one basis point decrease in CDS spread for a firm with a CDS spread of 100 bps. We also confirm the negative relation between systematic risk proportion and CDS spreads via various robustness tests. Thus, we conclude that the systematic risk proportion is an important determinant that Merton’s model does not capture.

Key Words: 신용부도스왑,체계적 위험,CDS 결정요인,CDS Determinant,Credit Default Swap,GJR 모형,GJR-GARCH,Merton 모형,Merton Model,Systematic Risk Proportion