The Influence Of Sovereign Risk On The Pricing Of Credit Default Swap

Credit Default Swap (CDS) is a credit derivative tool with the largest trading volume and fastest development in the credit derivative market. During the contract period, the credit protection buyer pays periodic or one-off premiums to the credit protection seller. Once a loss occurs to the reference entity due to a credit event, the protection seller pays compensation to the protection buyer for the loss part of the reference entity. In this way, credit asset owners can conduct the credit risk management proactively and dynamically. Therefore, CDS plays a crucial role in the worldwide credit risk management.In June 2015, Greece failed to repay 1.5 billion euros it owned to the International Monetary Fund, Greece became the first developed country to default on a loan with the IMF. Although the Greece debt crisis this time made a short effect to the Eurozone, and the probability of a breakout of the European Sovereign Debt Crisis is quite small, the crisis can still be deemed as a continuation of the previous sovereign debt crisis. The sovereign credit risk of the developed economies with burden of debts keeps increasing year after year, and has gradually become a major problem concerned by policy and market. During the breakout and contagion of the European Sovereign Debt Crisis which started in 2009, CDS became the focus again in market and academia. After the breakout of the European Sovereign Debt Crisis, CDS has been widely discussed and argued by academia. Based on the existed literature, the paper takes European countries as the object of study and 2009-2015 as the time frame. The paper sets the factors from market, corporate and trading aspects as variables, makes an empirical study based on panel regression model, introduces sovereign risk to corporate CDS by sovereign CDS, and mainly focuses on the influence of sovereign risk on the pricing of CDS. The paper shows that the price volatility of sovereign CDS well explains the price volatility of corporate CDS, and sovereign risk has a direct and remarkable impact on the corporate CDS price. Finally, the paper proposes an illumination to the Chinese investors’financial products investment overseas.