CDS pricing using a Copula-Monte Carlo Approach

Reyna Susana García Ruiz, Francisco López-Herrera () and Salvador Cruz-Ake
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Reyna Susana García Ruiz: Facultad de Contaduría y Administración, Universidad Nacional Autónoma de México
Salvador Cruz-Ake: Escuela Superior de Economía, Instituto Politécnico Nacional

Revista de Investigación en Ciencias Contables y Administrativas, 2017, vol. 3, issue 1, 111-133

Abstract: This paper proposes a methodology, based on Copula, Monte Carlo, and Bootstrap methodologies, to price a CDS without using more data than the one provided by the financial statements. This means that our methodology could be suitable not only for firms listed in the exchange market but also for nonlisted firms, so the results shown on the paper could extend the possibility of pricing CDS. The propounded methodology links the default probabilities to some key variables which dependence structure is captured by a copula and recombine it for pricing the CDS. To test the validity of the proposed methodology, we used data from TV Azteca (a media Mexican Company with recent financial concerns) and we obtained a CDS spread similar to the default rate implied in its credit risk rating.

Keywords: Credit Default Swap; CDS; Copula-Monte Carlo; Default Probabilities. (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:snh:journl:v:3:y:2017:i:1:p:111-133

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