Inferring Correlations of Asset Values and Distances-to-Default from CDS Spreads: A Structural Model Approach

Chanatip Kitwiwattanachai and Neil D. Pearson

The Review of Asset Pricing Studies, 2015, vol. 5, issue 1, 112-154

Abstract: Using structural credit risk models to estimate default dependence requires estimates of correlations of changes in distance-to-default. We present a structural model that yields simple relations between asset value, distance-to-default, and CDS spreads, allowing the correlations to be estimated from CDS spreads. We generalize the model to include a randomly varying default boundary; in this version the distance-to-default dynamics also depend on the movement of the default boundary. The CDS spread correlations we estimate exceed equity correlations, consistent with a randomly varying default boundary. We also present evidence that variations in funding liquidity affect the correlations, consistent with recent models.

JEL-codes: G13 G23 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:oup:rasset:v:5:y:2015:i:1:p:112-154.

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