Macroeconomic Conditions and Credit Default Swap (CDS) Spread Changes

We investigate whether the business cycle is an important determinant of credit default swap (CDS) spreads and estimate the expected market risk premium as a proxy for the business cycle. Through portfolio regression, we find that structural model variables, including the business cycle, explain approximately 68% of the differences in CDS spreads. Furthermore, the business cycle variable is strongly significant, and its substantial explanatory power is greater for investment-grade firms than for non-investment-grade firms. This finding is consistent with the recent theory that a structural model incorporating countercyclical risk for macroeconomic conditions can help explain the credit spread puzzle