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Determinants of Credit Default Swap Spread: Evidence from the Japanese Credit Derivative Market

Determinants of Credit Default Swap Spread: Evidence from the Japanese Credit Derivative Market Comments by Carl R. Chen The authors study the determinants of credit default swap spread using Japanese data set containing 106 firms from January 2001 to December 2004.

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Determinants of Credit Default Swap Spread: Evidence from the Japanese Credit Derivative Market

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  1. Determinants of Credit Default Swap Spread: Evidence from the Japanese Credit Derivative Market Comments by Carl R. Chen The authors study the determinants of credit default swap spread using Japanese data set containing 106 firms from January 2001 to December 2004. Leverage and volatility (implied or historical ?) are positively related to the CDS spread, while risk-free rate is negatively related. The effects are larger for lower credit firms.

  2. Since similar models focusing on US and European data have been studied, stronger motivation is needed. • Statistics emphasizing the importance of Japanese credit default swap market canbe provided. • Why stop in 2004? In the wake of recent financial crisis, the development in the CDS after 2007 is of more interest. • Can you plot the CDS spread over time? It may give some information regarding structure changes • Partitioning the sample into two subperiods of equal time-series observation is ad hoc. Internet bubbles extend from 2001 to 2003/09. Again, a plot of the CDS spread is helpful for preliminary analysis. Handerson (2001) and/or Bai-Perron (2002) provide more rigorous tests forregime shift.

  3. Volatility is found to be negatively related to CDS spread for the financial industry. This is counter theory and counter intuition. Possible explanations need tobe tried. • Alternative volatility can be measured, e.g., GARCH process • Liquidity risk may be as important as other variables; attempts canbe made to incorporate such risk • Use SUR model for Table 3 (high & low credit); test parameter equality • Update Ericsson et al. The reference shows that the article is “forthcoming” in 2005

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