An Empirical Comparison of Default Swap Pricing Models
AbstractIn this paper we compare market prices of credit default swaps with model prices. We showthat a simple reduced form model with a constant recovery rate outperforms the market practice ofdirectly comparing bonds' credit spreads to default swap premiums. We find that the model workswell for investment grade credit default swaps, but only if we use swap or repo rates as proxy fordefault-free interest rates. This indicates that the government curve is no longer seen as thereference default-free curve. We also show that the model is insensitive to the value of theassumed recovery rate.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 02-004/2.
Date of creation: 22 Jan 2002
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- Houweling, P. & Vorst, A.C.F., 2002. "An Empirical Comparison of Default Swap Pricing Models," Research Paper ERS-2002-23-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
- Patrick Houweling & Ton Vorst, 2001. "An Empirical Comparison of Default Swap Pricing Models," Finance 0112003, EconWPA.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-06-13 (All new papers)
- NEP-FIN-2002-06-13 (Finance)
- NEP-FMK-2002-06-13 (Financial Markets)
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