The Empirical Investigation of the Term Structure of Corporate CDS Spreads

Kim, Jungmu; Ryu, Doojin; Park, Yuen Jung

Korean Journal of Financial Studies 2016;45(2):447-475.
Published online April 30, 2016.

Jungmu Kim, Doojin Ryu, Yuen Jung Park

CDS 스프레드 기간구조에 대한 고찰

김정무, 류두진, 박윤정

Abstract

This study investigates the determinants of the term structure of Credit Default Swap (CDS) spreads in the Korean market. Contrary to the prediction of structural models, we find no evidence that firm-specific variables, such as leverage ratio and asset volatility, play a role in determining the shape of the CDS term structure. Instead, we find evidence that market-wide variables such as the risk-free rate, term premium, and yield on AAA bonds are important determinants. Interestingly, the slope of the CDS term structure predicts future changes in CDS spreads even after controlling for the determinants of CDS spreads based on structural models. Our findings suggest that structural models cannot fully explain the shape of the term structure. In addition, some potential factors, which are incorporated in CDS slope and predict future CDS spreads, should be considered in modelling credit risk derivatives to explain the CDS term structure.

Key Words: 신용부도스왑,예측력,CDS 기간구조,CDS 기울기,CDS 스프레드 변화,CDS Slope,CDS Spread Changes,CDS Term Structure,Credit Default Swap,Predictability