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http://dx.doi.org/10.5762/KAIS.2011.12.10.4359

Determinants of Credit Default Swap Spreads: The Case of Korean Firms  

Park, Yoon-S. (Dept. of International Business, The George Washington University)
Kim, Han-Joon (Dept. of Business Administration, Hoseo University)
Publication Information
Journal of the Korea Academia-Industrial cooperation Society / v.12, no.10, 2011 , pp. 4359-4368 More about this Journal
Abstract
Among several macroeconomic missteps blamed for the recent global financial crisis including the social problems of income distribution and the lack of proper financial remedies, two of them have received particular attention: the global BOP(Balance of Payment) imbalance and the misguided monetary policy. Such BOP imbalance was blamed for massive foreign exchange investment flows from Asia into the U.S., triggering the financial and real estate bubble in America. The latter refers to the excessively loose monetary policy of the U.S. Federal Reserve, which pushed financial institutions and households into reckless investment behavior in search of higher returns. Given the abuse of certain innovative financial techniques and new investment instruments that have been created in recent decades, both collateralized debt obligations (CDOs) and credit default swaps (CDS) enjoyed a symbiotic and toxic relationship prior to the financial crisis This paper is organized as follows: The first section analyzes the real causes of the recent financial crisis. The second details the role of CDOs and CDS. Then, to identify key determinants of the CDS spreads in an emerging capital market, the sample data of major Korean firms' CDS spreads are used to estimate the risk premium by utilizing the multiple regression analysis. The empirical test result indicates that Korean 3-year treasury bond rate(TYIELD), market to book value ratio(MV/BV), and assets size(INASSETS) are shown to demonstrate statistically significant influences on the changes of the CDS premium for sample firms.
Keywords
CDS Spreads; CDO; AIG; Emerging Capital Markets; Korean Case;
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