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- Title
Decomposing European CDS Returns*.
- Authors
Berndt, Antje; Obreja, Iulian
- Abstract
Nearly half of the variation in European CDS returns is captured by a novel factor that mimics economic catastrophe risk. During the financial crisis of 2007–8, this factor became more important relative to other sources of risk, leading to a shift in the correlation structure of CDS returns. Using equivalent CDS and equity portfolios, we show that while crucial for explaining temporal and cross-sectional variation in CDS returns, the factor plays a lesser role for equity. This is likely due to the limited sensitivity of the equity value at default to whether the event is of systemic or idiosyncratic nature.
- Subjects
EUROPE; SWAPS (Finance); DEFAULT (Finance); MARKET volatility; FINANCIAL crises
- Publication
Review of Finance, 2010, Vol 14, Issue 2, p189
- ISSN
1572-3097
- Publication type
Article
- DOI
10.1093/rof/rfq004