Abstract
We extend the study of Ben Dor, Dynkin, Hyman, Houweling, Leeuwen and Penninga [2007] on the behaviour of corporate bond spreads to the realm of credit default swaps using a new estimation technique. The quasi-maximum likelihood approach we employ can accommodate the stochastic nature of the relation between spread volatility and spread level. Consistent with the results for corporate bonds, we find support for a linear relationship between spread volatility and spread level with some evidence of non-linear effects.
TOPICS: Fixed income and structured finance, statistical methods, credit default swaps
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