Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/148050
Authors: 
Pelster, Matthias
Vilsmeier, Johannes
Year of Publication: 
2016
Series/Report no.: 
Discussion Paper, Deutsche Bundesbank 43/2016
Abstract: 
We apply Bayesian Model Averaging and a frequentistic model space analysis to assess the pricing-determinants of credit default swaps (CDS). Our study focuses on the complete model space of plausible models covering most of the variables and specifications used elsewhere in the literature, including different copula models. The approach followed supports ultimate transparency and robustness for the empirical study at hand. Using a large data-set of CDS contracts we find that CDS price dynamics can be mainly explained by factors describing firms' sensitivity to extreme market movements. More precisely, our results suggest that dynamic copula based measures of tail dependence incorporate almost all essential pricing information making other potential determinants such as Merton-type factors or variables measuring the systematic market evolution - based on simple means or principal component analysis - negligible.
Subjects: 
CDS
bayesian model averaging
crash aversion
tail risk
tail dependence
time-varying copulas
JEL: 
G12
C11
G01
ISBN: 
978-3-95729-314-5
Document Type: 
Working Paper

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