Recovering Default Risk from CDS Spreads with a Nonlinear Filter
نویسندگان
چکیده
We propose a nonlinear lter to estimate the time-varying instantaneous default risk from the term structure of credit default swap (CDS) spreads. Based on the numerical solution of the Fokker-Planck equation (FPE) using a meshfree interpolation method, the lter performs a joint estimation of default intensities and CIR model parameters. As the FPE can account for nonlinear functions and nonGaussian errors, the proposed framework provides more exibility and accuracy. We test the nonlinear lter on simulated CDS spreads and apply it to daily CDS spreads of the Dow Jones Industrial Average component companies from 2005 to 2010 with supportive results.
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