Pricing default swaps: Empirical evidence
Abstract
In this paper we compare market prices of credit default swaps with model prices. We show that a simple reduced form model with a constant recovery rate outperforms the market practice of directly comparing bonds' credit spreads to default swap premiums. We find that the model works well for investment grade credit default swaps, but only if we use swap or repo rates as proxy for default-free interest rates. This indicates that the government curve is no longer seen as the reference default-free curve. We also show that the model is insensitive to the value of the assumed recovery rate(This abstract was borrowed from another version of this item.)
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Bibliographic Info
Article provided by Elsevier in its journal Journal of International Money and Finance.
Volume (Year): 24 (2005)
Issue (Month): 8 (December)
Pages: 1200-1225
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Handle: RePEc:eee:jimfin:v:24:y:2005:i:8:p:1200-1225
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Web page: http://www.elsevier.com/locate/inca/30443
For corrections or technical questions regarding this item, or to correct its listing, contact: (Jeroen Loos).
Related research
Keywords:Other versions of this item:
- Houweling, P. & Vorst, A.C.F., 2003. "Pricing default swaps: empirical evidence," Econometric Institute Report EI 2003-51, Erasmus University Rotterdam, Econometric Institute.
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