The asymmetric effect of equity volatility on credit default swap spreads

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This study examines whether good and bad news have any asymmetric effect on credit default swap (CDS) spreads by decomposing equity volatility into continuous variation and signed jumps depending on the information. We find that negative jumps affect CDS spreads more significantly and economically than positive jumps even after controlling for other variables related to credit risk. This finding suggests that negative jumps in equity prices would be a credit risk factor of individual firms. Moreover, the effects of jumps on CDS spreads are more pronounced for firms with high leverage ratios and small sizes. Finally, we show that our findings remain intact even when considering the global financial crisis period and different CDS maturity terms. (C) 2018 Elsevier B.V. All rights reserved.
Publisher
ELSEVIER SCIENCE BV
Issue Date
2019-01
Language
English
Article Type
Article
Citation

JOURNAL OF BANKING & FINANCE, v.98, pp.125 - 136

ISSN
0378-4266
DOI
10.1016/j.jbankfin.2018.11.001
URI
http://hdl.handle.net/10203/250110
Appears in Collection
MT-Journal Papers(저널논문)
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