Asset pricing factors and bank CDS spreads

Abstract

This study compares the explanatory power of various asset pricing and macroeconomic risk factors in their ability to explain changes in the CDS spreads of global systemically important banks (G-SIBs). The factors include higher moment equity risks along with systematic sources of risk, such as investor uncertainty, interbank risk and foreign exchange volatility. For comparison, the five-factor asset pricing model by Fama and French (2017) is also implemented as a possible tool for explaining CDS spread changes. Estimation results from the quantile regression framework used herein show that heterogeneity in the explanatory power of the factors across low credit risk periods and high credit risk periods, such as during the 2008–09 financial crisis and 2011–13 European debt crisis, are a likely reason why extant time series regression models of CDS spreads yield instability in coefficient estimates and varying degrees of statistical significance across sample periods and time.