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Credit Default Swaps - What are these products and which factors influence its prices?

Barreira Gomes Neves, Nuno
(2017)

Files

Neves_11131501_20162017.pdf
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Details

Supervisors
HENRARD, LUC
Faculty
Louvain School of Management
Degree label
Master [120] en sciences de gestion
Abstract
This master thesis starts by providing insightful insides about credit default swaps (CDS), their benefits, costs, and how these credit derivatives’ market has been evolving in the past years. The main question that this dissertation aims to answer is what are the factors that influence the prices of these financial products. The period under analysis corresponds to the time between January 2006 to December 2016, and a sample of 72 European non-financial companies has been used. Through an econometric study using panel data regressions, the three theoretical determinants (leverage, risk-free rate and historical volatility) proposed by Merton’s model are firstly tested. All variables have found to be statistically significant but the low explanatory power of this regression (14.88%) suggests there are other factors influencing CDS prices. By considering additional variables accounting for firm, market and liquidity factors, the explanatory power of all determinants more than doubled (34.33%). In addition, there is a multi-period analysis where all the determinants are analysed throughout different periods of the whole sample set to check for changes in their significance. The main conclusion is that the theoretical determinants have rather limited power when explaining CDS prices and therefore other variables should be, though carefully, considered. In addition, not all variables have always had the same significance when explain CDS price changes. This thesis ends with a consideration of its limitations, and some suggestions to overcome these issues.