Explaining Credit Default Swap Spreads with the Equity Volatility and Jump Risks of Individual Firms

• 成果类型: Article
• 署名作者: Zhang, Benjamin Yibin; Zhou, Hao; Zhu, Haibin
• 署名单位: Federal Reserve System - USA; Federal Reserve System Board of Governors
• 刊物名称: REVIEW OF FINANCIAL STUDIES
• ISSN/ISSBN: 0893-9454
• DOI: 10.1093/rfs/hhp004
• 发表日期: 2009
• 页码: 5099
• 关键词: CORPORATE YIELD SPREADS; term structure; stochastic volatility; bond; debt; variance; implicit; models

摘要

This paper attempts to explain the credit default swap (CDS) premium, using a novel approach to identify the volatility and jump risks of individual firms from high-frequency equity prices. Our empirical results suggest that the volatility risk alone predicts 48% of the variation in CDS spread levels, whereas the jump risk alone forecasts 19%. After controlling for credit ratings, macroeconomic conditions, and firms' balance sheet information, we can explain 73% of the total variation. We calibrate a Merton-type structural model with stochastic volatility and jumps, which can help to match credit spreads after controlling for the historical default rates. Simulation evidence suggests that the high-frequency-based volatility measures can help to explain the credit spreads, above and beyond what is already captured by the true leverage ratio.