The 21 reference contexts in paper Christopher F Baum, Chi Wan (2009) “Macroeconomic Uncertainty and Credit Default Swap Spreads” / RePEc:boc:bocoec:724

  1. Start
    2018
    Prefix
    As a standardized swap contract, CDS can be traded over the counter, which enables investors to hedge or speculate on credit risk in a relatively cost-effective way. CDS spreads fluctuate over time to reflect changes in the creditworthiness of the reference entities. As documented in
    Exact
    Longstaff, Mithal and Neis (2005), Chen, Lesmond and Wei (2007), Houweling, Mentink and Vorst (2005),
    Suffix
    as well as in Elton, Gruber, Agrawal and Mann (2004), corporate bond yields are largely driven by liquidity factors and tax effects, which might bias quoted bond yields as a gauge of credit risk. In contrast, CDS spreads, expressed in basis points per annum, provide a more direct and readily-available alternative measurement of credit risk.
    (check this in PDF content)

  2. Start
    2133
    Prefix
    CDS spreads fluctuate over time to reflect changes in the creditworthiness of the reference entities. As documented in Longstaff, Mithal and Neis (2005), Chen, Lesmond and Wei (2007), Houweling, Mentink and Vorst (2005), as well as in
    Exact
    Elton, Gruber, Agrawal and Mann (2004),
    Suffix
    corporate bond yields are largely driven by liquidity factors and tax effects, which might bias quoted bond yields as a gauge of credit risk. In contrast, CDS spreads, expressed in basis points per annum, provide a more direct and readily-available alternative measurement of credit risk.
    (check this in PDF content)

  3. Start
    2473
    Prefix
    ), Houweling, Mentink and Vorst (2005), as well as in Elton, Gruber, Agrawal and Mann (2004), corporate bond yields are largely driven by liquidity factors and tax effects, which might bias quoted bond yields as a gauge of credit risk. In contrast, CDS spreads, expressed in basis points per annum, provide a more direct and readily-available alternative measurement of credit risk. Furthermore,
    Exact
    Blanco, Brennan and Marsh (2005), Zhu (2006), and Norden and Weber (2004)
    Suffix
    have reported that CDS spreads tend to be more responsive to changes in the stock market and firms’ credit conditions than bond yields. Consequently, several recent papers, including Houweling and Vorst (2005), Hull, Predescu and White (2004) and Pan and Singleton (2008), have relied on CDS spreads to directly measure the credit risk attributable to issuers’ default risk.
    (check this in PDF content)

  4. Start
    2742
    Prefix
    Furthermore, Blanco, Brennan and Marsh (2005), Zhu (2006), and Norden and Weber (2004) have reported that CDS spreads tend to be more responsive to changes in the stock market and firms’ credit conditions than bond yields. Consequently, several recent papers, including
    Exact
    Houweling and Vorst (2005), Hull, Predescu and White (2004) and Pan and Singleton (2008),
    Suffix
    have relied on CDS spreads to directly measure the credit risk attributable to issuers’ default risk. A number of recent studies have investigated the empirical determinants of credit spreads. Campbell and Taksler (2003) document that firm-specific return volatility is able to explain about one-third of the variation in bond spreads.
    (check this in PDF content)

  5. Start
    3022
    Prefix
    Consequently, several recent papers, including Houweling and Vorst (2005), Hull, Predescu and White (2004) and Pan and Singleton (2008), have relied on CDS spreads to directly measure the credit risk attributable to issuers’ default risk. A number of recent studies have investigated the empirical determinants of credit spreads.
    Exact
    Campbell and Taksler (2003)
    Suffix
    document that firm-specific return volatility is able to explain about one-third of the variation in bond spreads. More recently, Zhang, Zhou and Zhu (2005) 2 further document that equity volatility and jump processes have strong explanatory power in the pricing of CDS.
    (check this in PDF content)

  6. Start
    3178
    Prefix
    A number of recent studies have investigated the empirical determinants of credit spreads. Campbell and Taksler (2003) document that firm-specific return volatility is able to explain about one-third of the variation in bond spreads. More recently,
    Exact
    Zhang, Zhou and Zhu (2005)
    Suffix
    2 further document that equity volatility and jump processes have strong explanatory power in the pricing of CDS. Tang and Yan (2008a) and Bongaerts, de Jong and Driessen (2008) suggest the importance of illiquidity issues in pricing CDS.
    (check this in PDF content)

  7. Start
    3316
    Prefix
    Campbell and Taksler (2003) document that firm-specific return volatility is able to explain about one-third of the variation in bond spreads. More recently, Zhang, Zhou and Zhu (2005) 2 further document that equity volatility and jump processes have strong explanatory power in the pricing of CDS.
    Exact
    Tang and Yan (2008a) and
    Suffix
    Bongaerts, de Jong and Driessen (2008) suggest the importance of illiquidity issues in pricing CDS. The primary objective of this paper is to examine the role of macroeconomic uncertainty in determining credit spreads.
    (check this in PDF content)

  8. Start
    3952
    Prefix
    The effect of macroeconomic uncertainty on CDS spreads is ambiguous.1On the one hand, greater macroeconomic uncertainty may increase the firm’s default risk as firms are more likely to be credit constrained. For instance,
    Exact
    Korajczyk and Levy (2003)
    Suffix
    shows that macroeconomic conditions affect a firm’s ability to borrow. Baum, Stephan and Talavera (2009) and Baum, Chakraborty and Liu (2010) report strong empirical evidence that macroeconomic uncertainty plays an important role in determining both the level and changes of the firm’s leverage.
    (check this in PDF content)

  9. Start
    4059
    Prefix
    The effect of macroeconomic uncertainty on CDS spreads is ambiguous.1On the one hand, greater macroeconomic uncertainty may increase the firm’s default risk as firms are more likely to be credit constrained. For instance, Korajczyk and Levy (2003) shows that macroeconomic conditions affect a firm’s ability to borrow.
    Exact
    Baum, Stephan and Talavera (2009) and Baum, Chakraborty and Liu (2010)
    Suffix
    report strong empirical evidence that macroeconomic uncertainty plays an important role in determining both the level and changes of the firm’s leverage. Therefore, uncertainty increases CDS spreads.
    (check this in PDF content)

  10. Start
    5262
    Prefix
    existing literature acknowledges the importance of the levels of macroeconomic factors in determining CDS spreads, we show that the second moments of these factors—macroeconomic uncertainty—have significant explanatory power over and above that of traditional macroeconomic factors such as the risk-free rate and the Treasury term spread. Our results nicely complement the empirical findings re1
    Exact
    Tang and Yan (2006) and Tang and Yan (2008b)
    Suffix
    model firms’ default risk as depending on (among other factors) the volatility of aggregate economic growth. However, their model contains a fixed level of volatility, while we focus upon variations in macroeconomic volatility as a factor influencing CDS spreads. 3 ported by Arnold and Vrugt (2008) and Arshanapalli, d’Ouville, Fabozzi and Switzer (2006).
    (check this in PDF content)

  11. Start
    5589
    Prefix
    Our results nicely complement the empirical findings re1Tang and Yan (2006) and Tang and Yan (2008b) model firms’ default risk as depending on (among other factors) the volatility of aggregate economic growth. However, their model contains a fixed level of volatility, while we focus upon variations in macroeconomic volatility as a factor influencing CDS spreads. 3 ported by
    Exact
    Arnold and Vrugt (2008) and
    Suffix
    Arshanapalli, d’Ouville, Fabozzi and Switzer (2006). Specifically, Arnold and Vrugt document a positive link between stock market volatility and macroeconomic uncertainty; Arshanapalli et al. show that both stock and bond markets have higher volatility during the period of macroeconomic announcements.
    (check this in PDF content)

  12. Start
    5979
    Prefix
    Specifically, Arnold and Vrugt document a positive link between stock market volatility and macroeconomic uncertainty; Arshanapalli et al. show that both stock and bond markets have higher volatility during the period of macroeconomic announcements. One study that is closely related to our paper is
    Exact
    Tang and Yan (2008b).
    Suffix
    Based on structural credit risk models, Tang and Yan examine the impact of market conditions on credit spreads, showing that CDS spreads are decreasing in GDP growth rate, but increasing in GDP growth volatility.
    (check this in PDF content)

  13. Start
    6703
    Prefix
    Our models control for firms’ unobserved heterogeneity (e.g. managerial attributes, corporate governance and the company’s executive compensation policies) that may affect firms’ credit conditions. For instance,
    Exact
    Graham, Harvey and Puri (2009)
    Suffix
    provide strong evidence that managerial heterogeneity affects corporate financial policies such as acquisitions and capital structure. Moreover, a large body of literature shows, both theoretically (e.g.
    (check this in PDF content)

  14. Start
    6946
    Prefix
    For instance, Graham, Harvey and Puri (2009) provide strong evidence that managerial heterogeneity affects corporate financial policies such as acquisitions and capital structure. Moreover, a large body of literature shows, both theoretically (e.g.
    Exact
    John and John (1993) and Jin (2002)) and
    Suffix
    empirically (e.g. Rajgopal and Shevlin (2002), Knopf, Nam and Thornton (2002) and Coles, Daniel and Naveen (2006)), that firms’ compensation structures may offer managers with incentives for risk-taking and thus affect firms’ credit quality.
    (check this in PDF content)

  15. Start
    7006
    Prefix
    For instance, Graham, Harvey and Puri (2009) provide strong evidence that managerial heterogeneity affects corporate financial policies such as acquisitions and capital structure. Moreover, a large body of literature shows, both theoretically (e.g. John and John (1993) and Jin (2002)) and empirically (e.g.
    Exact
    Rajgopal and Shevlin (2002), Knopf, Nam and Thornton (2002) and Coles, Daniel and Naveen (2006)),
    Suffix
    that firms’ compensation structures may offer managers with incentives for risk-taking and thus affect firms’ credit quality. Our primary finding of a positive effect of macroeconomic uncertainty on credit spreads is largely unaffected after further controlling for issuers’ fixed effects.
    (check this in PDF content)

  16. Start
    7936
    Prefix
    Finally, we conclude in Section IV. 4 II. Data sources and construction In this section, we detail the data sources used in our study and how variables are constructed. Identifying macroeconomic uncertainty In our investigation, as in
    Exact
    Driver, Temple and Urga (2005), Byrne and Davis (2002) and Baum, Caglayan, Ozkan and Talavera (2006),
    Suffix
    we employ aGARCHmodel to proxy for macroeconomic uncertainty. We believe that this approach is more appropriate compared to alternatives such as proxies obtained from moving standard deviations of the macroeconomic series (e.g.
    (check this in PDF content)

  17. Start
    8284
    Prefix
    uncertainty In our investigation, as in Driver, Temple and Urga (2005), Byrne and Davis (2002) and Baum, Caglayan, Ozkan and Talavera (2006), we employ aGARCHmodel to proxy for macroeconomic uncertainty. We believe that this approach is more appropriate compared to alternatives such as proxies obtained from moving standard deviations of the macroeconomic series (e.g.
    Exact
    Ghosal and Loungani (2000))
    Suffix
    or survey-based measures based on the dispersion of forecasts (e.g. Graham and Harvey (2001); Schmukler, Mehrez and Kaufmann (1999)). To ensure the robustness of our empirical findings, we construct three proxies for macroeconomic uncertainty from the conditional variance of the GDP growth rate, the index of industrial production and the returns on the S&P 500 Composite Index.
    (check this in PDF content)

  18. Start
    8380
    Prefix
    We believe that this approach is more appropriate compared to alternatives such as proxies obtained from moving standard deviations of the macroeconomic series (e.g. Ghosal and Loungani (2000)) or survey-based measures based on the dispersion of forecasts (e.g.
    Exact
    Graham and Harvey (2001); Schmukler, Mehrez and Kaufmann (1999)). To
    Suffix
    ensure the robustness of our empirical findings, we construct three proxies for macroeconomic uncertainty from the conditional variance of the GDP growth rate, the index of industrial production and the returns on the S&P 500 Composite Index.
    (check this in PDF content)

  19. Start
    9045
    Prefix
    The first measure is the conditional variance of the growth rate of a monthly measure of real gross domestic product. We derive the monthly GDP series via the proportional Denton procedure using the monthly index of industrial production as an interpolating variable (see
    Exact
    Baum (2001))
    Suffix
    from quarterly real GDP (International Financial Statistics series 99BRZF). This measure is designed to reflect the overall uncertainty of the macroeconomic environment. The second measure is derived from the monthly index of industrial production (International Financial Statistics series 66IZF).
    (check this in PDF content)

  20. Start
    15632
    Prefix
    A high dividend payout ratio implies a decrease in the firm’s cash reserves, and may also indicate that the firm lacks profitable investment opportunities. The 8 positive sign of the dividend payout ratio is consistent with
    Exact
    Zhang et al. (2005).
    Suffix
    Table 7 provides results for BBB-rated issuers, also comprising about 40% of the sample, with broadly similar results and an elasticity of 0.56 forsprtrn. Interestingly, the included macroeconomic factors—the short rate and the Treasury term spread—exhibit positive and significant coefficients in this rating category as well.
    (check this in PDF content)

  21. Start
    21204
    Prefix
    findings, drawn from a sizable panel dataset, further understanding of determinants of CDS spreads and provide strong empirical evidence of the importance of macroeconomic volatility in credit derivative markets, which should not be ignored in economic policy and credit risk management. Furthermore, given the difficulty of structural models in accurately estimating and predicting credit spreads
    Exact
    (Teixeira (2007)),
    Suffix
    an interesting direction of future research is to incorporate macroeconomic uncertainty to improve the performance of credit risk models. 11
    (check this in PDF content)