7-3 (A88)

Determinants of Credit Default Swap Spread:Evidence from the Japanese Credit Derivative Market

 

Keng-Yu Ho

National Taiwan University, Taiwan

Yu-Jen Hsiao

National Central University, Taiwan

Wen-Chi Lo

National Central University, Taiwan

 

In this paper, we investigate the determinants of credit default swap (CDS) spread for the Japanese market. Although the Japanese CDS market is one of the major markets in the world, to the best of our knowledge, there has been no related study so far. We thus contribute the literature by focusing on the Japanese market. The empirical results show that the theoretical determinants perform well in explaining cross-sectional variation in the level of CDS spread. However, the model has rather limited explanatory power on the difference in the level of CDS spread. We also find that the effect of leverage, historical volatility, and risk-free rate are larger for lower credit rating firms than for higher credit rating firms in the level of CDS spread. In addition, on the difference in the level of CDS spread, the empirical results indicate that the lower the credit rating, the more sensitive the changes in CDS spread are to the changes in the historical volatility and risk-free rate. Finally, our findings remain robust for different sub-sample periods and non-financial industry firms.