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Measuring Default Risk Premia from Default Swap Rates and EDFs

Author

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  • Antje Berndt
  • Rohan Douglas
  • Darrell Duffie
  • Mark Ferguson

Abstract

This 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.

Suggested Citation

  • Antje Berndt & Rohan Douglas & Darrell Duffie & Mark Ferguson, "undated". "Measuring Default Risk Premia from Default Swap Rates and EDFs," GSIA Working Papers 2006-E31, Carnegie Mellon University, Tepper School of Business.
    • Handle: RePEc:cmu:gsiawp:1749033791
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    File URL: https://student-3k.tepper.cmu.edu/gsiadoc/wp/2006-E31.pdf
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