Modeling US bank CDS spreads during the Global Financial Crisis with a deferred filtration pricing model
This paper uses a simplified version of the Duffie and Lando (2002) deferred filtration model to handle the effect of asymmetric information about US banks asset portfolios during the recent crisis, when banks were reluctant to lend to one another because they were not sure about the balance sheet strength of the counterparty and its ability to repay. The accounting lag in the deferred filtration model gives a very useful way of calibrating this uncertainty and provides convenient closed forms suitable for econometric models. I use these to model the default probabilities implied by CDS rates. Comparing the fit of this model with that of the standard full information structural defaultable debt pricing model strongly supports the hypothesis that investors were wary of the value of accounting information. The performance of the model is comparable to that of a benchmark reduced form hazard rate model, the workforce of the empirical literature to date.
|Date of creation:||Jul 2013|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (0)1904 323776
Fax: (0)1904 323759
Web page: http://www.york.ac.uk/economics/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Martin Baxter, 2007. "Lévy Simple Structural Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(04), pages 593-606.
- Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
- Anderson, Ronald & Sundaresan, Suresh, 2000. "A comparative study of structural models of corporate bond yields: An exploratory investigation," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 255-269, January.
- Jacco Thijssen, 2010. "Irreversible investment and discounting: an arbitrage pricing approach," Annals of Finance, Springer, vol. 6(3), pages 295-315, July.
When requesting a correction, please mention this item's handle: RePEc:yor:yorken:13/18. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paul Hodgson)
If references are entirely missing, you can add them using this form.