On Pricing Credit Default Swaps With Observable Covariates
نویسندگان
چکیده
We introduce a discrete time no-arbitrage model with observable covariates, which allows for a closed form solution for the value of credit default swaps (CDS). The default intensity is speci ed as a quadratic function of the covariates, ensuring that the intensity function is always positive. The model yields economically plausible results in terms of t, sign of coe¢ cients and statistical signi cance. We demonstrate that macroeconomic and rm-speci c information can explain most of the variation in CDS spreads over time and across rms, even with a parsimonious speci cation. We also investigate the importance of statistical assumptions for analyzing the e¤ects of observable covariates. Our results suggest that although swap spreads are highly auto-correlated, the analysis of spread levels is very informative, and it is sometimes di¢ cult to discern the impact of observable covariates from di¤erence regressions. JEL Classi cation: G12
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