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Pricing default swaps: empirical evidence

Patrick Houweling and Ton Vorst ()

No EI 2003-51, Econometric Institute Research Papers from Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute

Abstract: In this paper we compare market prices of credit default swaps with model prices. We show that a simple reduced form model with a constant recovery rate outperforms the market practice of directly comparing bonds' credit spreads to default swap premiums. We find that the model works well for investment grade credit default swaps, but only if we use swap or repo rates as proxy for default-free interest rates. This indicates that the government curve is no longer seen as the reference default-free curve. We also show that the model is insensitive to the value of the assumed recovery rate

Keywords: credit default swaps; credit risk; default risk; recovery rates; reduced form models (search for similar items in EconPapers)
JEL-codes: C13 G12 G13 (search for similar items in EconPapers)
Date: 2003-08-07
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Journal Article: Pricing default swaps: Empirical evidence (2005) Downloads
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