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Trading in the Credit Derivatives market with equity-based Credit Default Swap spreads

Nilsson, Martin and Palmstierna, Jakob (2007)
Department of Economics
Abstract
This thesis gives an introduction to BASEL II and hence a motivation for the
use of credit derivatives in general and Credit Default Swaps in particular.
We develope (from Atlan and Leblanc (2005) and Bengtsson and Bjurhult
(2006)) a model to price the CDS contracts and use this in a trading strategy
- trying to find risk arbitrage.
The probability of default (PD), used in the pricing model, is derived
from the stopped (i.e. the model stops as the stock price reaches 0) Constant
Elasticity of Variance (CEV ) model and uses only the equity price for the
corresponding company as input. From the equity price, historical volatility
is estimated and also used in the model. Available data is CDS spreads
(for calibration) and equity price (for... (More)
This thesis gives an introduction to BASEL II and hence a motivation for the
use of credit derivatives in general and Credit Default Swaps in particular.
We develope (from Atlan and Leblanc (2005) and Bengtsson and Bjurhult
(2006)) a model to price the CDS contracts and use this in a trading strategy
- trying to find risk arbitrage.
The probability of default (PD), used in the pricing model, is derived
from the stopped (i.e. the model stops as the stock price reaches 0) Constant
Elasticity of Variance (CEV ) model and uses only the equity price for the
corresponding company as input. From the equity price, historical volatility
is estimated and also used in the model. Available data is CDS spreads
(for calibration) and equity price (for calibration and also prediction of CDS
spreads).
A simple trading strategy is adopted. This is because we only want an
indication of the qualitative properties of the model. The results from the
trading are good, showing profit in 8 out of 9 companies. (Less)
Please use this url to cite or link to this publication:
author
Nilsson, Martin and Palmstierna, Jakob
supervisor
organization
year
type
M2 - Bachelor Degree
subject
keywords
credit default swap, Basel II, Capital Structure Arbitrage, Probability of Default, equity-based modelling, Economics, econometrics, economic theory, economic systems, economic policy, Nationalekonomi, ekonometri, ekonomisk teori, ekonomiska system, ekonomisk politik
language
English
id
1337752
date added to LUP
2007-02-05 00:00:00
date last changed
2010-08-03 10:49:32
@misc{1337752,
  abstract     = {{This thesis gives an introduction to BASEL II and hence a motivation for the
use of credit derivatives in general and Credit Default Swaps in particular.
We develope (from Atlan and Leblanc (2005) and Bengtsson and Bjurhult
(2006)) a model to price the CDS contracts and use this in a trading strategy
- trying to find risk arbitrage.
The probability of default (PD), used in the pricing model, is derived
from the stopped (i.e. the model stops as the stock price reaches 0) Constant
Elasticity of Variance (CEV ) model and uses only the equity price for the
corresponding company as input. From the equity price, historical volatility
is estimated and also used in the model. Available data is CDS spreads
(for calibration) and equity price (for calibration and also prediction of CDS
spreads).
A simple trading strategy is adopted. This is because we only want an
indication of the qualitative properties of the model. The results from the
trading are good, showing profit in 8 out of 9 companies.}},
  author       = {{Nilsson, Martin and Palmstierna, Jakob}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Trading in the Credit Derivatives market with equity-based Credit Default Swap spreads}},
  year         = {{2007}},
}