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Are CDS Spreads Sensitive to the Term Structure of the Yield Curve? A Sector-Wise Analysis under Various Market Conditions

Department of Management Sciences, COMSATS University Islamabad, 44000 Islamabad, Pakistan
J. Risk Financial Manag. 2019, 12(4), 158; https://doi.org/10.3390/jrfm12040158
Received: 20 August 2019 / Revised: 25 September 2019 / Accepted: 27 September 2019 / Published: 29 September 2019
This study examines the impact of changes in the yield curve factors on the Credit Default Swap (CDS) spreads of the U.S. industrial sectors. Stock returns and the crude oil-based volatility index are used in a quantile regression framework to test the validity of Merton’s model. The results suggest that the long-term factor of the yield curve is a negatively significant determinant of the CDS premia regardless of the sector and market state. The CDS spread of the financial sector exhibits sensitivity to the short-term factor of the yield rate in extreme market states. Basic materials, oil and gas and the utilities sector are responsive to variations in the medium-term factor of the yield rate in upmarket conditions. The empirical findings also suggest a significant inverse relationship between CDS spreads and stock returns. View Full-Text
Keywords: credit default swap; credit risk; term structure; quantile regression credit default swap; credit risk; term structure; quantile regression
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Aman, A. Are CDS Spreads Sensitive to the Term Structure of the Yield Curve? A Sector-Wise Analysis under Various Market Conditions. J. Risk Financial Manag. 2019, 12, 158.

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