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An Empirical Comparison of Default Swap Pricing Models

Patrick Houweling and Ton Vorst ()

Finance from University Library of Munich, Germany

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; risk-neutral valuation; pricing (search for similar items in EconPapers)
JEL-codes: G12 G13 C13 (search for similar items in EconPapers)
Date: 2001-12-21
New Economics Papers: this item is included in nep-fmk
Note: Type of Document - PDF; prepared on PC; to print on any;
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Related works:
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 (2002) Downloads
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