Measuring Default Risk Premia from Default Swap Rates and EDFs

DefaultRisk.com the web's biggest credit risk modeling resource.

Submit Your Paper

Fitch Ratings Jobs

[ Worldwide]

Post Your Résumé
For Recruiters

5^th Most Cited

An Introduction to Copulas -- 2nd Edition

An Introduction to Copulas - 2nd Ed.
by Roger B. Nelsen, Springer, January 13, 2006, Hardcover, 270 pages

Training Discounted for DefaultRisk.com visitors only:

The Mathematics of Credit Derivatives: The Essential Credit Modelling and Pricing Companion
by Philipp J. Schönbucher,
WBS Training, August 2003, DVD / Interactive CD-ROM

Sponsor:
Shop at Amazon.com and support DefaultRisk.com

Measuring Default Risk Premia from Default Swap Rates and EDFs

by Antje Berndt of Cornell University,
Rohan Douglas of Quantifi LLC,
Darrell Duffie of Stanford University,
Mark Ferguson of Quantifi LLC, and
David Schranz of CIBC

November 15, 2005

Abstract: This paper estimates the price for bearing exposure to U.S. corporate default risk during 2000-2004, based on the relationship between default probabilities, as estimated by Moody's KMV EDFs, and default swap (CDS) market rates. The default-swap data, obtained through CIBC from 39 banks and specialty dealers, allow us to establish a strong link between actual and risk-neutral default probabilities in the three sectors that we analyze: broadcasting and entertainment, healthcare, and oil and gas. We find dramatic variation over time in risk premia, from peaks in the third quarter of 2002, dropping by roughly 50% to late 2003.

Books Referenced in this Paper: (what is this?)