In this paper we will explain how to perfectly hedge under Heston’s stochastic volatility model with jump to default, which is in itself a generalization of the Merton jump-to-default model and a special case of the Heston model with jumps. The hedging instruments we use to build the hedge will be as usual the stock and the bond, but also the Variance Swap (VS) and a Credit Default Swap (CDS). ...

Multi-asset credit derivatives trade in huge volumes, yet no models exist that are capable of properly accounting for the spread behaviour of dependent companies. In this thesis we consider new ways of incorporating a richer and more realistic dependence structure into multi-firm models. We focus on the structural framework in which firm value is modelled as a geometric Brownian motion, with de...

In this paper we formulate a corporate bond (CB) pricing model for deriving the term structure of default probabilities (TSDP) and the recovery rate (RR) for each pair of industry factor and credit rating grade, and these derived TSDP and RR are regarded as what investors imply in forming CB prices in the market at each time. A unique feature of this formulation is that the model allows each fi...

This paper attempts to elucidate whether firm performance and macroeconomic conditions play a significant role in explaining credit default swap (CDS) spreads. Our panel dataset covers 112 reference entities in four markets (South Korea, Hong Kong, France, and Germany) for the period 2001-12. Overall, our results suggest that market value indicators (Tobin’s Q, stock market returns, and the int...

We analyse the links between credit default swap (CDS) and bond spreads and try to determine which one is the leading market in the price discovery process. To do that, we construct a sample of CDS premia and bonds spreads on a generic 5-year bond, for 17 financials and 18 sovereigns. First, we run VECM estimations, showing that the CDS market has a lead over the bond market over the whole samp...

We use the advent of new credit default swap (CDS) trading conventions in April 2009—the CDS Big Bang—to study how a shock to funding liquidity impacts market liquidity. After Bang, traders are required pay upfront fees execute transactions, with size depending on level spreads. While bid-ask spreads decline aggregate after they do so less for contracts that require larger fees. Furthermore, ef...

Theory predicts that the accounting information transparency affects credit spreads. Given that one of the putative benefits of International Financial Reporting Standards (IFRS) is transparency of accounting information, this study evaluates the impact of IFRS on the pricing of credit spreads in the over-the-counter Credit Default Swap (CDS) market. Using a difference in differences methodolog...

We present a multi-dimensional jump-diffusion version of a structural default model and show how to use it in order to value the credit value adjustment for a credit default swap. We develop novel analytical and numerical methods for solving the corresponding boundary value problem with a special emphasis on the role of negative asset value jumps. Using recent market data, we show that under re...

Abstract The aim of this paper is to analyze the long-lasting dynamic relationship between credit default swap (CDS) premia and government bond spreads (GBS), with regard sovereign risk. practical focus evaluate whether CDS market effectively leading or lagging in risk price discovery process during last decade monetary easing. analysis extends all “sensitive” countries Eurozone, so-called “PII...