Modelling multiple term structures of defaultable bonds with common and idiosyncratic state variables

Transmission of Financial Stress in Europe: The Pivotal Role of Italy and Spain, but not Greece

“…See, for example,Kim et al (2008), andDungey et al (2005).9 As determinants of changes in SCDS they include changes in interest rates (10-year bond yields), changes in slope of the yield curve (change in spreads on 10-and 2-year Treasury bonds), changes in equity prices (S&P 500 and Stoxx index), and changes in the implied equity volatility (near-the-money put options). ` 10 Using U.S. and U.K. corporate bond data,Lekkos (2007) estimates a reduced form of a dynamic factor model for the interest rate term structure of defaultable bonds which include common factor variables. Variables used to measure the credit cycles' indicators included: the slope of the term structure (10-year vs. 3-month U.S. Treasuries), the level of the term structure (changes in the 3-month U.S. Treasury bill rate), the spread between Libor and the U.S. Treasury bill (TED spread), interest rate swap spreads (3-, 7-and 10-year swaps), and equity returns (Financial Time Stock Exchange, FTSE-100 for the U.K. and S&P500 for the U.S.).11 Using a regime-switching model, González-Hermosillo and Hesse (2011) proxy global market conditions using three variables: VIX index, TED spreads and the Euro-Dollar Foreign Currency Swap.12 Using a panel of corporate firms across January 2001 to December 2003, this paper explains the CDS premium using as explanatory variables the credit ratings, recovery rate used by CDS price providers, return on equity, firm leverage, dividend payout ratio and global market conditions such as S&P 500, VIX index, TED spread and the short interest rate.©International Monetary Fund.…”

The dependence structure in credit risk between money and derivatives markets

“…That said, research on investigating the TED spread remains rather limited and mostly confined to using the spread as a measure of funding liquidity (see, e.g. Lekkos, 2007;Beber et al, 2010;Brennan et al, 2012); while others have used the spread as a proxy for counterparty risk (see, e.g. Cardarelli et al, 2011;Ng, 2012;Levich, 2012).…”