Measuring Default Risk Premia from Default Swap Rates and EDFs
AbstractThis paper estimates the degree of variation over time in the price for bearing exposure to U.S. corporate default risk during 2000-2004, based on the relationship between default probabilities, as estimated by Moody’s KMV EDFs, and default swap (CDS) market rates. The default-swap data, obtained through CIBC from 39 banks and specialty dealers, allow us to establish a strong link between actual and risk-neutral default probabilities in the three sectors that we analyze: broadcasting and entertainment, healthcare, and oil and gas. We find dramatic variation over time in risk premia, from peaks in the third quarter of 2002, dropping by roughly 50% to late 2003.
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Bibliographic InfoPaper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2006-E31.
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Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
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- Antje Berndt & Rohan Douglas & Darrell Duffie & Mark Ferguson & David Schranz, 2005. "Measuring default risk premia from default swap rates and EDFs," BIS Working Papers 173, Bank for International Settlements.
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