Research On The Influencing Factors To Credit Derivative Price Fluctuation

The financial crisis that is broke up during2007-2009eventually led to theglobal economic downturn and the stock market has shrunk dramatically scale.Comparing with before, this crisis has some new features. The U.S. real estate marketcorrection triggered by the subprime loans solvency crisis eventually led to the globalfinancial tsunami. It is widely believed that the credit derivatives is the culprit of thecrisis, many hedge fund managers, including George Soros, suggests that most andeven all transactions of the credit default swaps should be terminated. This paperfocus on how does the linkage between financial markets affect the price of creditderivatives, which has important practical significance for China in the furtherdevelopment of the credit derivatives market, and enhance financial market riskscontrollable.First of all, although many scholars research on credit derivatives pricing, theymainly from the products founded essence angle priced, fresh from the perspective ofempirical research literature to examine the financial market price linkage, but basedon the subprime mortgage crisis and the debt crisis in Ireland debt crisis, lossescaused by the crisis is far more than the underlying debt. Credit derivatives graduallybecome speculative instrument, and the original hedging risk function almostdisappeared; now it has the ability to affect macroeconomic performance.Secondly, through rechecking conduction effect of the subprime mortgage crisisand clarifying the conduction relationship between the crisis in the credit markets,capital markets and the real economy, determining the economic variab les thatpossibly cause fluctuations in the price of credit derivatives, to prepare for theempirical analysis of the selected variables.Besides, from the indicators that may cause credit derivatives price fluctuations and based on the results of previous studies, to select four variables which canrepresent the domestic and foreign market liquidity, capital risk aversion and stockmarket volatility of commodity as the main investigated object. Granger causality testfound that the price index of credit derivatives can reversely decide debt default risk.The intention for credit derivatives is to provide risk protection and promotion offinancial intermediation, but with the size of the market is growing, the marketconcentration higher and higher, more and stronger pricing power, its reverse decisionfunction on the bond market is more and more obvious. After analysis of variable cointegration, we found that investment-grade credit default swap index has long-termpositive equilibrium relationship with the U.S. dollar index and WTI crude oil pricesand long-term negative relationship with the S&P index and the TED spread.Investors’ risk aversions, market liquidity as well as the real economy trends becomea major factor in the impact of variable long-term relationships.Finally, by using the structural vector autoregression model to analyze thedynamic variables, and through the impulse response function we found that:compared with normal times, during the subprime crisis stock market volatility hasgreater impact on the credit derivatives market, with positive stock impact causepositive changes to the credit default swap index, and cumulative impulse responsevalue is negative, hence stock prices and CDS prices rising at the same time, butduring a period of steady economic growth, the cumulative effect is zero; domesticand foreign market liquidity is influenced by the central bank’s monetary policy, andits impacts on the direction of the credit derivatives market is random, but in normaltimes showing a positive cumulative effect lasting; under the influence of changes incapital risk aversion, the impacts of dollar index on fluctuations in the price ofderivative products with the level of market risk changes in the directional change.During the subprime crisis, investors pursue stable income when market risk is high,impulse response function’s cumulative impact of negative effect perform as positivefirst and then negative; influenced by geopolitical factors during the subprime crisis,changes in crude oil futures prices influenced the credit derivatives market israndomly, after the subprime mortgage crisis, changes in market prices of crude oiland macroeconomic trends coincide, short-term displays an anti to changes in the relationship.To sum up, the prices of credit derivatives is not only influenced by debt defaultrisk change, but also by domestic and foreign market liquidity, capital risk aversion,as well as equities, foreign exchange, commodity market volatility. Credit derivatives,as is to be hedging the default risk, generally it did not reduce the risk of financialevents but turned out to booster the financial crisis and debt crisis. With thedevelopment of the domestic market for credit derivatives, in credit product designand trading mechanisms we should focus more on its speculative property control.