Review of Finance Vol. 14 No. 2 2010
Decomposing European CDS Returns
Abstract
Nearly half of the variation in European CDS returns is captured by a novel factor that mimics economic catastrophe risk. During the financial crisis of 2007–8, this factor became more important relative to other sources of risk, leading to a shift in the correlation structure of CDS returns. Using equivalent CDS and equity portfolios, we show that while crucial for explaining temporal and cross-sectional variation in CDS returns, the factor plays a lesser role for equity. This is likely due to the limited sensitivity of the equity value at default to whether the event is of systemic or idiosyncratic nature.
- DOI
- 10.1093/rof/rfq004
- Volume
- 14
- Issue
- 2
- Pages
- 189-233
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref