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An Empirical Comparison of Default Swap Pricing Models

Patrick Houweling and Ton Vorst ()

No ERS-2002-23-F&A, ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam

Abstract: 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 derivatives, credit risk, default risk, default-free interest rates

Keywords: credit default swaps; credit derivatives; credit risk; default risk; default-free interest rates; empirical models; market prices (search for similar items in EconPapers)
JEL-codes: C13 G12 G13 G3 M (search for similar items in EconPapers)
Date: 2002-02-27
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Working Paper: An Empirical Comparison of Default Swap Pricing Models (2002) Downloads
Working Paper: An Empirical Comparison of Default Swap Pricing Models (2002) Downloads
Working Paper: An Empirical Comparison of Default Swap Pricing Models (2001) Downloads
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