Using Credit Derivatives to Compute Market-Wide Default Probability Term Structures
AbstractIn this paper we suggest a simple way of backing out market-wide risk-neutral default probability (and default density) distributions from quoted credit default swap (CDS) index spreads. We apply the approach to two market-wide European portfolios represented by two frequently traded iTraxx Europe CDS indexes, and the resulting analytical default probability term structures are updated on a daily basis. We believe such instantaneous default probability term structures to be useful not only for risk managers in commercial banks but also for hedge funds and others involved in speculation and arbitrage as well as for supervisory authorities like central banks in their quest for financial stability.
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Bibliographic InfoPaper provided by Lund University, Department of Economics in its series Working Papers with number 2005:44.
Length: 14 pages
Date of creation: 25 Oct 2005
Date of revision:
Publication status: Published in Journal of Fixed Income, 2005, pages 34-41.
Contact details of provider:
Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/
More information through EDIRC
iTraxx; credit default swap index; default probability; term structure;
Find related papers by JEL classification:
- C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-12-01 (All new papers)
- NEP-EEC-2005-12-01 (European Economics)
- NEP-FIN-2005-12-01 (Finance)
- NEP-FMK-2005-12-01 (Financial Markets)
- NEP-RMG-2005-12-01 (Risk Management)
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