Pricing the Risk of Default: Are Bonds Enough?
نویسندگان
چکیده
This paper implements a reduced form credit default swap (CDS) pricing model. Theoretical prices found are compared with market prices to evaluate the goodness of fit. Theoretical prices and pricing errors are inspected by rating classes, sectors of economic activity and currency denomination of CDS. Pricing errors are analyzed through panel data estimation techniques, to find determinants of pricing errors. These determinants could be used in theoretical pricing models as well as by practitioners when evaluating credit risk. Results suggest that debt market information is not enough for pricing credit risk and that equity markets have the potential for complementing credit pricing techniques. JEL Classification: C23, G12, G13
منابع مشابه
A comprehensive unified model of structural and reduced form type for defaultable fixed income bonds
The aim of this paper is to generalize the comprehensive structural model for defaultable fixed income bonds (considered in R. Agliardi, A comprehensive structural model for defaultable fixed-income bondsو Quant. Finance 11 (2011), no. 5, 749--762.) into a comprehensive unified model of structural and reduced form models. In our model the bond holders receive the deterministic co...
متن کاملPricing Callable Bonds with Stochastic Interest Rate and Stochastic Default Risk: a 3d Finite Difference Model
This paper presents a 3D model for pricing defaultable bonds with embedded call options. The pricing model incorporates three essential ingredients in the pricing of defaultable bonds: stochastic interest rate, stochastic default risk, and call provision. Both the stochastic interest rate and the stochastic default risk are modeled as a square-root diffusion process. The default risk process is...
متن کاملA Defaultable Callable Bond Pricing Model: a 3d Finite Difference Approach
This paper presents a 3D model for pricing defaultable bonds with embedded call options. The pricing model incorporates three essential ingredients in the pricing of defaultable bonds: stochastic interest rate, stochastic default risk, and call provision. Both the stochastic interest rate and the stochastic default risk are modeled as a square-root diffusion process. The default risk process is...
متن کاملPricing Covered Bonds
Covered bonds1 have emerged as a potentially preferred funding vehicle from the credit crisis, and they were already a major part of many European financial systems. Although some prices are directly available on, for example Bloomberg2, there is no detailed examination of how covered bonds should be priced taking into account the features that make them attractive to investors: i.e. over-colla...
متن کاملPricing Defaultable bonds and CDS with PDE methods
The market for credit derivatives is growing rapidly. The credit derivative market’s global size was estimated to be $100 billion to $200 billion in 1996. The British Bankers Association estimated that the size was $1.6 trillion in 2001. Now the size is about $62 trillion [10]. The demand is strong because credit derivatives provide varieties that can fit different clients. The fundamental cred...
متن کامل