In this paper we compare market prices of credit default swaps with model prices. We show that a simple reduced form model outperforms directly comparing bonds’ credit spreads to default swap premiums. We find that the model yields unbiased premium estimates for default swaps on investment grade issuers, but only if we use swap or repo rates as proxy for default-free interest rates. This indica...

We propose a dynamically consistent framework that allows joint valuation and estimation of stock options and credit default swaps written on the same reference company. We model default as controlled by a Poisson process with a stochastic default arrival rate. When default occurs, the stock price drops to zero. Prior to default, the stock price follows a continuous process with stochastic vola...

Abstract We analyze the impact of introduction credit default swaps (CDSs) on real decision-making within firm. Our structural model predicts that CDS increases debt capacity more when uncertainty about events trigger payment is lower. Using a sample than 56,000 firms across 51 countries, we find CDSs increase leverage in legal and market environments where obligations reduced property rights a...

Introduction The modelling of dependence between defaults is a key issue for the valuation and risk management of multi-name credit derivatives. The Gaussian copula model seems to have become an industry standard for pricing. It’s appeal is partly due to its ease of implementation via Monte Carlo simulation and the fact that the underlying dependence structure has for a long time been linked to...

This paper explores a reasonable coupon rate for basket credit linked notes (CLN) with issuer default risk. Based on the one factor Gaussian copula model, this paper proposes three methods for incorporating issuer default into basket CLN pricing. Numerical results indicate that issuer default risk impacts basket CLN coupon rate. Furthermore, the coupon rate differs with changes in correlation s...