An Empirical Analysis Of Factors Affecting US CDS Prices

Credit derivatives products originated in the 1990s in the United States, mainly used for the separation and transfer of credit risk. Because of its dispersion of credit risk, enhancement financial market liquidity, expanding the scale of the market and improvement of the effectiveness and efficiency of financial markets, credit derivatives have been rapidly developing. Among them, the credit default swaps get overwhelmingly dominant position in credit derivatives trading market.Under the background of the direct financing has becoming an important direction of China’s financial reform, quit of bank guarantee expanded the potential capacity of the credit bond market. At this time, the introduction of CDS will help bond credit risk management, and promote the development of the credit bond market. On the one hand, CDS provides credit enhancement, which can reduce the difficulty of the issue of debentures. On the other hand, discovery function of CDS price helps improve asset pricing in financial markets, and provide important credit information for regulators, investment and research institutions. China’s financial system is in a critical period of credit reform, CDS products provide investors with credit risk stripping tool and bring revolutionary changes to the credit risk management approach. Currently credit risk mitigation tool pilot operations officially were launched in the inter-bank bond market, known as the "Chinese version of the CDS".The introduction of CDS needs not only the reasonable institutional arrangements and regulatory programs, but also the appropriate arrangements for risk and transaction procedures, and the most critical factor is to be reasonably priced. Although the multiple pricing theory of credit default swap exist, but the industry has not yet formed a unified pricing approach. By studying the development of credit derivatives and pricing model, based on the US credit derivatives market CDS data, do empirical analysis of pricing and factors affecting the price of CDS product and give out more intuitive CDS pricing method, which will promote credit derivatives market development in China.This paper study three main aspects of CDS prices including credit risk factors, liquidity factors and factors of risk-free rate factors. The paper is divided into six parts:The first part is an introduction, including research background, significance of the topic, the relevant literature review, the paper frame structure, the innovation and inadequate. The second part is an overview of CDS, a brief introduction to the origin of CDS. The third part is the development of CDS all around the world including the function of CDS and the role played in the US subprime mortgage crisis and the European debt crisis, finally elaborates CDS development in China. The fourth part is CDS pricing model analysis and theoretical analysis, this chapter introduces the two standard pricing models, respectively, structural model and simplicity of the model, and compare the difference between the two, on the other hand introduces the impact of credit risk factors, liquidity factors and risk-free rate factors. The fifth part is an empirical analysis of CDS price factors, from selecting the variables for the agent, selecting the sample data to establishing an empirical model, and finally presents the results of empirical analysis and related conclusions. The sixth part is the policy recommendations included seven aspects, to establish an electronic trading platform, improve the market-maker system with commercial banks leading, improve the regulatory mechanism, establish information disclosure system and financial intermediaries rating mechanism, establish information sharing mechanism, establish crisis management mechanism, introduce and train financial talents.