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Article

Open Access

European CDS Premiums and Industrial Production

Author(s)

Lechner Gerhard,Vogl Dieter

Full-Text PDF Download XML 914 Views

DOI:10.17265/1548-6591/2016.04.004

Affiliation(s)

FH JOANNEUM, University of Applied Sciences, Graz, Austria

ABSTRACT

This paper aims to find the dependence of the important European corporate CDS (Credit Default Swaps) indices and some selected country CDS of industrial production. While the existing literature acknowledges the importance of macroeconomic factors in determining CDS spreads from a general perspective, the importance of economic growth for individual firms, banks, and countries has not been examined in detail. The main hypothesis of the paper claims that weaker ratings are more growth-sensitive than better ratings. This means that the CDS will react more strongly to the industrial production when the rating is weaker. The authors analyzed the European CDS indices of investment grade, high yield enterprises, senior bank debt, and subordinated bank debt with a linear OLS (Ordinary Least Squares) regression. While the authors had to reject their main hypothesis for the European indices, they could prove their hypothesis concerning the country perspective: The German CDS has the weakest relation to industrial output, and the authors’ hypothesis can be confirmed tendentially concerning the correlations of the more weakly rated countries (European periphery), which are much better. Surprisingly the correlation between peripheral country CDS and industrial production is much stronger than the correlation of corporate and bank CDS and industrial production.

KEYWORDS

industrial production, European credit default swaps, determinant of CDS

Cite this paper

Journal of US-China Public Administration, April 2016, Vol. 13, No. 4, 256-262

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