SURVEY OF THE LITERATURE: Credit Default Swap Spreads
Sanjiv R. Das and Paul Hanouna
Volume 4, Number 3, Third Quarter 2006
We review the literature on credit default swap spreads, which are fast replacing bond spreads as source data for analyzing and predicting credit risk. We review results that examine the basis, i.e. the difference between bond and CDS spreads, enabling the extraction of liquidity measures. Results show that pure structural models may be enhanced by macro and firm level variables to better explain spreads; credit premiums extracted from reduced-form models are highly variable; and that there are statistically significant interactions between the term structures of interest rates and spreads.