Modeling and pricing of credit derivatives using macroeconomic information

Bernd Schmid (), Rudi Zagst (), Stefan Antes and Fayssal El Moufatich
Additional contact information
Bernd Schmid: UBS, Postal: London, http://www.ubs.com/
Rudi Zagst: Technical University Munich, Postal: Munich, http://portal.mytum.de/welcome
Stefan Antes: Technical University Munich, Postal: Munich, http://portal.mytum.de/welcome
Fayssal El Moufatich: RiskLab, Postal: Germany, http://www.risklab.de/

Journal of Financial Transformation, 2009, vol. 26, 60-68

Abstract: We show how to price credit default options and swaps based on a four-factor defaultable term-structure model. One of the key factors is a macroeconomic factor that takes into account the impact of the general economy on the quality of firms. We derive the pricing functions and show how to calibrate the model to market prices. Basically, we need three pieces of information: the actual non-defaultable, the defaultable, and the zero-recovery defaultable term structure. The first two pieces can be easily obtained from observable market data, the latter can be inferred from the other two. We illustrate the whole pricing process, from model specification and parameter estimation to the actual credit derivatives pricing. Our data includes the recent credit crisis and proves the performance of our model even through times of market dislocation.

Keywords: Credit default options; Swaps; defaultable term-structure model (search for similar items in EconPapers)
JEL-codes: G12 G13 G21 G32 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:jofitr:1395

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