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Modeling CDS spreads: A comparison of some hybrid approaches
- Publication Year :
- 2020
-
Abstract
- According to the credit risk model proposed by Cathcart and El-Jahel (2006), default can occur either expectedly, when a certain signaling variable breaches a lower barrier, or unexpectedly, as the first jump of a Poisson process, whose intensity depends on the signaling variable itself and on the interest rate. In the present paper we test the performances of such a model and of other three models generalized by it in fitting the term structure of credit default swap (CDS) spreads. In order to do so, we derive a semi-analytical formula for pricing CDSs and we use it to fit the observed term structures of 65 different CDSs. The analysis reveals that all the model parameters yield a relevant contribution to credit spreads. Moreover, if the dependence of the default intensity on both the signaling variable and the interest rate is removed, the pricing of CDSs becomes very simple, from both the analytical and the computational standpoint, while the goodness-of-fit is reduced by only a few percentage points. Therefore, when using the credit risk model proposed by Cathcart and El-Jahel (2006), assuming a constant default intensity provides an interesting and efficient compromise between parsimony and goodness-of-fit. Furthermore, by fitting the term structure of CDS spreads on a period of about twelve years, we find that the parameters of the model with constant default are rather stable over time, and the goodness-of-fit is maintained high.
- Subjects :
- Economics and Econometrics
Credit default swap
media_common.quotation_subject
CDS
Default risk
Hybrid model
0502 economics and business
Econometrics
media_common
Mathematics
040101 forestry
050208 finance
05 social sciences
Percentage point
04 agricultural and veterinary sciences
Settore SECS-S/06 - METODI MATEMATICI DELL'ECONOMIA E DELLE SCIENZE ATTUARIALI E FINANZIARIE
Interest rate
Term (time)
Variable (computer science)
Jump
0401 agriculture, forestry, and fisheries
Constant (mathematics)
Finance
Credit risk
Subjects
Details
- Language :
- English
- Database :
- OpenAIRE
- Accession number :
- edsair.doi.dedup.....0efded320264284302f8f0be5b54439c