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Entrop, O., Schiemert, R., Wilkens, M. Spread Risk Premia in Corporate Credit Default Swap Markets. Credit and Capital Markets – Kredit und Kapital, 47(4), 571-610. https://doi.org/10.3790/ccm.47.4.571
Entrop, Oliver; Schiemert, Richard and Wilkens, Marco. "Spread Risk Premia in Corporate Credit Default Swap Markets" Credit and Capital Markets – Kredit und Kapital 47.4, 2014, 571-610. https://doi.org/10.3790/ccm.47.4.571
Entrop, Oliver/Schiemert, Richard/Wilkens, Marco (2014): Spread Risk Premia in Corporate Credit Default Swap Markets, in: Credit and Capital Markets – Kredit und Kapital, vol. 47, iss. 4, 571-610, [online] https://doi.org/10.3790/ccm.47.4.571

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Spread Risk Premia in Corporate Credit Default Swap Markets

Entrop, Oliver | Schiemert, Richard | Wilkens, Marco

Credit and Capital Markets – Kredit und Kapital, Vol. 47 (2014), Iss. 4 : pp. 571–610

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Article Details

Author Details

Prof. Dr. Oliver Entrop, University of Passau, Chair of Finance and Banking, Innstr. 27, D-94032 Passau, Germany, phone: +49 851 509 2460

Dr. Richard Schiemert, Catholic University of Eichst tt-Ingolstadt, Ingolstadt School of Management, Auf der Schanz 49, D-85049 Ingolstadt, Germany, phone: +49 841 937 1881

Prof. Dr. Marco Wilkens, University of Augsburg, Chair of Finance and Banking, Universit tsstr. 16, D-86159 Augsburg, Germany, phone: +49 821 598 4124

Abstract

The spread risk premium component of credit default swap (CDS) spreads represents a compensation demanded by protection sellers for future changes in CDS spreads caused by unpredictable fluctuations in the reference entity"s risk-neutral default intensity. This paper defines and estimates a measure of the spread risk premium component in CDS spreads of a sample of European investment-grade firms by using a stochastic intensity credit model. Our results show that, on average, investors demand a positive premium for such mark-to-market risks. After controlling for CDS market conditions, like liquidity and supply/demand effects, a panel data analysis of the estimated spread risk premia reveals a positive impact of event risk captured by the overall stock market volatility and a negative impact of investors" appetite for exposure to credit markets as reflected by the overall CDS market.