The Drivers of European Credit Spread Changes

This paper examines the determinants of European credit default swap (CDS) spreads and corporate bond spreads. In line with extant research, a principal components analysis suggests a single large explanatory variable drives much of the spread variation. Our findings based on a combined analysis on a unique date set over a volatile period supports the view that market tradable proxies can explain in excess of 70 % of the spread variation. We found that credit ratings were a poor proxy for spread variation.