An empirical evaluation of alternative fundamental models of credit spreads |
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| Affiliation: | 1. School of Economics and Management, China University of Geosciences (Beijing), Beijing 100083, China;2. Key Laboratory of Carrying Capacity Assessment for Resource and Environment, Ministry of Natural Resources, Beijing 100083, China;1. Alfaisal University, Saudi Arabia;2. University of Leicester, UK;3. University of Lincoln, UK;4. University of Manchester, UK;1. United Arab Emirates University, United Arab Emirates;2. Montpellier Business School, France |
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| Abstract: | This study conducts an empirical comparison of how well alternative models of credit spreads explain CDS prices on 145 companies over the 2008–2019 interval. The results indicate that credit spreads are most closely related to theories which incorporate the likelihood of income insolvency into measures of the risk of jumps to default, with over half of individual CDS prices being explained, both during the financial crisis and thereafter. Out-of-sample tests using the same parameters estimated in-sample for all companies across time indicate that models which integrate the probability of income, cash, and valuation insolvency explain over 70% of spreads. |
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