Understanding the movement of CDS spread in the Korean market

Abstract

The objective of this study is to identify factors in the Korean Market that affect firms’ CDS spread by conducting simple and multivariate regressions on firm-specific variables inspired by the structural models and common market factors to explain the daily change in CDS spreads. I mainly find that three explanatory variables appear to outperform the other variables examined in this paper: daily return, change in return volatility, and common market factors. Market-wide information seems to have a more significant association with change in CDS spread in regression models. Mainly, co-movement of CDS spread of each firm with South Korea sovereign CDS spread is confirmed, and this tendency becomes even stronger during the global financial crisis and with the financial institution. In contrast, financial information has lower explanatory power for the daily movements of CDS spread due to the limitation of estimating daily values. Also, it is confirmed that when the bid-ask spread (%) is used as an illiquidity factor, the illiquidity level is shown to be positively associated with the change in CDS spread.