What drives corporate CDS spreads? A comparison across US, UK and EU firms

We investigate the determinants of corporate credit default swap spreads for US, UK and EU firms and decompose the predictive power of accounting-and market-based variables for spreads in pre-crisis, crisis and post-crisis periods. We find that the predictive power of accounting risk measures decreases during and following the crisis, and the growing relevance of market-based variables highlights the growing significance of forward-looking risk measures for modeling spreads. By decomposing bond yield spreads into default and non-default components, we find a significant non-zero basis in the post-crisis period, highlighting the mispricing between the two markets. We find that mispricing between the two markets has significant predictive power in forecasting subsequent price movement in the CDS market in the post-crisis period. (C) 2018 Elsevier B.V. All rights reserved.