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On the Pricing of Credit Default Swaps: A comparative Study between the Reduced-Form Model and the Structural Model

Gretarsson, Ivar Alfred and Ennab, Nicklas (2009)
Department of Economics
Abstract
This paper focuses on measurement methods of credit risk. By modeling credit default swap spreads and predicting possible defaults of corporations with the use of default probabilities this paper makes the search for consistent methods to measure and manage risk by constructing plausible forecasts of contingent corporate defaults. The purpose of this paper is to emphasize advantages and disadvantages of different approaches to measure credit risk. This paper undertakes the tasks to model credit default swap spreads, using two different approaches, and to calculate default probabilities. The modeled credit default spreads are compared to and valued with respect to the market set credit default swap spreads. By pointing out the relations and... (More)
This paper focuses on measurement methods of credit risk. By modeling credit default swap spreads and predicting possible defaults of corporations with the use of default probabilities this paper makes the search for consistent methods to measure and manage risk by constructing plausible forecasts of contingent corporate defaults. The purpose of this paper is to emphasize advantages and disadvantages of different approaches to measure credit risk. This paper undertakes the tasks to model credit default swap spreads, using two different approaches, and to calculate default probabilities. The modeled credit default spreads are compared to and valued with respect to the market set credit default swap spreads. By pointing out the relations and differences between the different models while valuating them this paper will hopefully generate a clear overview of two different approaches in the contemporary credit risk management and serve as a guide line for future credit risk management by highlighting the specific characteristics and outcomes of the different models. Further this paper considers the credibility in calculated default. Most importantly though this paper provides a new application to the Hull and White model of pricing a credit default swap. (Less)
Please use this url to cite or link to this publication:
@misc{1488350,
  abstract     = {This paper focuses on measurement methods of credit risk. By modeling credit default swap spreads and predicting possible defaults of corporations with the use of default probabilities this paper makes the search for consistent methods to measure and manage risk by constructing plausible forecasts of contingent corporate defaults. The purpose of this paper is to emphasize advantages and disadvantages of different approaches to measure credit risk. This paper undertakes the tasks to model credit default swap spreads, using two different approaches, and to calculate default probabilities. The modeled credit default spreads are compared to and valued with respect to the market set credit default swap spreads. By pointing out the relations and differences between the different models while valuating them this paper will hopefully generate a clear overview of two different approaches in the contemporary credit risk management and serve as a guide line for future credit risk management by highlighting the specific characteristics and outcomes of the different models. Further this paper considers the credibility in calculated default. Most importantly though this paper provides a new application to the Hull and White model of pricing a credit default swap.},
  author       = {Gretarsson, Ivar Alfred and Ennab, Nicklas},
  keyword      = {econometrics,Economics,The Structural model,The Reduce-form model,The Merton model,Credit default swap spread,The Hull and White model,Probability of Default,credit risk,economic theory,economic systems,economic policy,Nationalekonomi,ekonometri,ekonomisk teori,ekonomiska system,ekonomisk politik},
  language     = {eng},
  note         = {Student Paper},
  title        = {On the Pricing of Credit Default Swaps: A comparative Study between the Reduced-Form Model and the Structural Model},
  year         = {2009},
}