| Type: | Articles |
| Authors: | Patrick Houweling, Ton Vorst |
| Journal: | Journal of International Money and Finance, 24, 2005, pp. 1200-1225 |
| Abstract: | In this paper we compare market prices of credit default swaps with model prices. We show that a simple reduced form model with a constant recovery rate outperforms the market practice of directly comparing bonds' credit spreads to default swap premiums. We find that the model works well for investment grade credit default swaps, but only if we use swap or repo rates as proxy for default-free interest rates. This indicates that the government curve is no longer seen as the reference default-free curve. We also show that the model is insensitive to the value of the assumed recovery rate. |
| Notes: | This paper was formerly known as An Empirical Comparison of Default Swap Pricing Models. This paper is listed in SSRN's All Time Download Top 10s for Risk Management and for Derivatives. |
| Presentations: |
EFMA 2002 (European Financial Management Association; London; June 2002)
EFA 2002 (European Finance Association; Berlin; August 2002) 2nd T.N. Thiele Symposium on Financial Econometrics (University of Copenhagen; Copenhagen; October 2002) Forecasting Financial Markets 2003 (Centre for International Banking, Economics and Finance; Paris; June 2003) |
| Links: | SSRN page |
| Download: | cds.pdf (427 kB) |
