An empirical investigation of credit risk markets during financial crisis

Kryukova, Marina 2014. An empirical investigation of credit risk markets during financial crisis. PhD Thesis, Cardiff University. Item availability restricted.

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Abstract

This thesis addresses several issues in credit risk modelling through an empirical investigation of the two main markets where this risk is traded, namely corporate bond market and CDS market. In the first part, we investigate the main determinants of credit spreads in US and UK corporate bond markets between 2003 and 2011. We explore the effect of various factors predicted by structural form models on corporate bond yield spreads. In addition, we extend our investigation to credit spreads in the corresponding corporate CDS markets. Our analysis sheds light on interdependency between corporate bond and equity markets, and on power of contingent-claim models in determining credit spreads of corporate debt. In our study, we employ a variety of econometric techniques such as pooled OLS, fixed and random panel approach, non-linear interaction effects and random sub-sampling. Our analysis shows that factors suggested by structural models explain almost half of changes of the corporate yield spread for relatively stable period of economy and more than half for the total period including the recession. The two main factors identified were equity volatility and investor confidence as measured by TED spread. The second part is dedicated to a comparison of credit risk pricing in bond and CDS markets. In particular, we focus on the anomaly of negative CDS-Bond Basis during the recent financial crisis. Based on a no-arbitrage argument, we identify the factors that can explain the persistence of negative basis. We employ pooled OLS, panel regressions and Fama-MacBeth regression in our empirical analysis. The analysis identifies funding cost, collateral quality, liquidity risk, counterparty risk and basis volatility as the key factors driving the basis. We investigate the dynamic relation between the factors and the basis over the period covering the financial crisis. In addition, we identify and discuss the difference in dynamics of the basis for financial vs non-financial sectors, and investment grade vs high yield rating categories. Overall, the aim of the thesis is to contribute to a limited but growing literature on empirical issues in credit risk modelling during the recent financial crisis.

Item Type:	Thesis (PhD)
Status:	Unpublished
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > HC Economic History and Conditions
Funders:	Julian Hodge Fees
Date of First Compliant Deposit:	30 March 2016
Last Modified:	06 Oct 2023 14:51
URI:	https://orca.cardiff.ac.uk/id/eprint/68077

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