Explaining credit default swap premia

This article proposes a simple approach for explaining credit default swap premia. Specifically, it investigates the effects of historical and option-implied equity volatility on credit default swap premia, thus extending an idea proposed by Campbell and Taksler (in press) in the context of corporate bond yields. Using panel data of credit default swaps on 120 international firms from 1999 to mid-2002, it becomes evident that option-implied volatility is a more important factor in explaining variation in credit default swap premia than historical volatility. (C) 2004 Wiley Periodicals, Inc.