Determinants of credit default swap spread changes: The sell-side perspective

Abstract

This study revisits the credit spread puzzle using credit default swap spread changes between 2002 and 2020. We find that credit-related structural variables account for only 13.8% of the variation in credit default swap spread changes. There exists a single dominant common component that explains 49.8% of the regression residuals. Sell-side risk-bearing constraints are closely related to the unknown common component and significantly improve the explanatory power of credit default swap spread changes, particularly the commonality between them.