Author(s): Neves, Nuno Miguel Barreira Gomes
Date: 2017
Persistent ID: http://hdl.handle.net/10362/26974
Origin: Repositório Institucional da UNL
Subject(s): Credit default swaps; CDS spreads; Structural models; Explanatory variables; Merton’s model; Regressions; Domínio/Área Científica::Ciências Sociais::Economia e Gestão
This thesis starts by describing credit default swaps (CDS), their benefits, costs, and how the market for these credit derivatives has been evolving in the past years. The main question that this thesis aims to answer is what are the factors that influence the prices of these financial products. The period under analysis goes from 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 volatility - proposed by Merton’s model are firstly tested. All variables are 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 in different periods of the whole sample 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. I would like to sincerely thank both my thesis supervisors, professor João Pereira from Nova School of Business and Economics and professor Luc Henrard from the Louvain School of Management for their help, advices and availability throughout this project.
