Empirical Essays on Financial Economics
(2004) In Lund Economic Studies Abstract
 In the first essay of this thesis we develop a model for calculating the net expected value of a swap agreement subject to dualdefault risk. The main explanatory variable for the net expected return of a swap is the default intensity of each party measured by the credit rating of the firm. We derive the net expected return of the swap as a function of the credit rating of the firm receiving the fixed interest rate and credit rating of the firm receiving the floating interest rate. This net expected return will also depend on the stochastic process assumed for the shortterm interest rate as well as the initial interest rate, the time to maturity and the time between settlements. We calibrate a counting process, using historical data, for... (More)
 In the first essay of this thesis we develop a model for calculating the net expected value of a swap agreement subject to dualdefault risk. The main explanatory variable for the net expected return of a swap is the default intensity of each party measured by the credit rating of the firm. We derive the net expected return of the swap as a function of the credit rating of the firm receiving the fixed interest rate and credit rating of the firm receiving the floating interest rate. This net expected return will also depend on the stochastic process assumed for the shortterm interest rate as well as the initial interest rate, the time to maturity and the time between settlements. We calibrate a counting process, using historical data, for each firm. These processes represent the time to bankruptcy for each firm. We also calibrate a CIR model for the shortterm interest rate using historical data. These calibrated processes are used in Monte Carlo simulations to derive the net expected return of the swap. We find that the possibility of default has a large effect on the contract.
In the second essay we further investigate the swap pricing model used before. In order to obtain accurate net expected returns of swap agreements under dualdefault risk, it is important to model the process governing the interest rates correctly. In this chapter we present and evaluate different term structure models for the interest rate. The conclusion, of this essay, is that the net expected value of the swap is greatly influenced by the choice of term structure model. The differences in the net expected value of the swap between the investigated term structure models are considerable
In the third essay of this thesis we analyze the empirical relationship between credit risk and the price of a swap agreement. Our hypothesis is that companies do take the credit risk into consideration when entering swap agreements, either directly through the price or via some form of credit rationing. We have obtained a unique dataset from two Swedish companies containing all relevant information on their swap agreements, as well as full counterparty information. Using this dataset we are able to empirically test our hypothesis
In the final essay we develop an index for measuring the state of the Swedish economy with financial variables. Instead of using relative deviations from a specified date or level of the exchange rate, interest rate, house prices, and stock prices, as in a standard Financial Conditions Index (FCI), we use deviations from estimated (partial) equilibrium values. This framework makes it possible to differentiate between changes in the variables derived from underlying macroeconomic factors and changes that alter the monetary conditions in an economy. The deviations between actual and equilibrium values for the included variables are weighted together, using a VAR approach, in order to obtain an economic conditions index. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/record/466839
 author
 Degrér, Henrik ^{LU}
 opponent

 Professor Berglund, Tom, Svenska Handelshögskolan i Helsingfors
 organization
 publishing date
 2004
 type
 Thesis
 publication status
 published
 subject
 keywords
 Swap Agreements, Default Risk, Economic Conditions Index, Finansiering, Financial science, Term Structure of Interest Rates
 in
 Lund Economic Studies
 pages
 146 pages
 publisher
 Lund University
 defense location
 EC3:211 Holger Crafoords Ekonomicenter
 defense date
 20040422 10:15
 ISSN
 04600029
 language
 English
 LU publication?
 yes
 id
 76b0259bf15344d2bf4715f33e1f0591 (old id 466839)
 date added to LUP
 20070925 20:32:26
 date last changed
 20160919 08:44:55
@phdthesis{76b0259bf15344d2bf4715f33e1f0591, abstract = {In the first essay of this thesis we develop a model for calculating the net expected value of a swap agreement subject to dualdefault risk. The main explanatory variable for the net expected return of a swap is the default intensity of each party measured by the credit rating of the firm. We derive the net expected return of the swap as a function of the credit rating of the firm receiving the fixed interest rate and credit rating of the firm receiving the floating interest rate. This net expected return will also depend on the stochastic process assumed for the shortterm interest rate as well as the initial interest rate, the time to maturity and the time between settlements. We calibrate a counting process, using historical data, for each firm. These processes represent the time to bankruptcy for each firm. We also calibrate a CIR model for the shortterm interest rate using historical data. These calibrated processes are used in Monte Carlo simulations to derive the net expected return of the swap. We find that the possibility of default has a large effect on the contract.<br/><br> <br/><br> In the second essay we further investigate the swap pricing model used before. In order to obtain accurate net expected returns of swap agreements under dualdefault risk, it is important to model the process governing the interest rates correctly. In this chapter we present and evaluate different term structure models for the interest rate. The conclusion, of this essay, is that the net expected value of the swap is greatly influenced by the choice of term structure model. The differences in the net expected value of the swap between the investigated term structure models are considerable<br/><br> <br/><br> In the third essay of this thesis we analyze the empirical relationship between credit risk and the price of a swap agreement. Our hypothesis is that companies do take the credit risk into consideration when entering swap agreements, either directly through the price or via some form of credit rationing. We have obtained a unique dataset from two Swedish companies containing all relevant information on their swap agreements, as well as full counterparty information. Using this dataset we are able to empirically test our hypothesis<br/><br> <br/><br> In the final essay we develop an index for measuring the state of the Swedish economy with financial variables. Instead of using relative deviations from a specified date or level of the exchange rate, interest rate, house prices, and stock prices, as in a standard Financial Conditions Index (FCI), we use deviations from estimated (partial) equilibrium values. This framework makes it possible to differentiate between changes in the variables derived from underlying macroeconomic factors and changes that alter the monetary conditions in an economy. The deviations between actual and equilibrium values for the included variables are weighted together, using a VAR approach, in order to obtain an economic conditions index.}, author = {Degrér, Henrik}, issn = {04600029}, keyword = {Swap Agreements,Default Risk,Economic Conditions Index,Finansiering,Financial science,Term Structure of Interest Rates}, language = {eng}, pages = {146}, publisher = {Lund University}, school = {Lund University}, series = {Lund Economic Studies}, title = {Empirical Essays on Financial Economics}, year = {2004}, }