Measuring credit risk: The relation between CDS Spreads, the modified Merton model and credit ratings
(2013) NEKH01 20122Department of Economics
- Abstract
- Prior articles and reports have named Credit Default Swap (CDS) spreads as a
plausible indicator of default risk. In this report, the authors present a significant
correlation between CDS spreads and two other more acknowledged methods of
measuring default risk probabilities; the modified Merton model and credit ratings
from the rating institute Moody’s. The tests are implemented by Spearman’s rank
correlation with data obtained between the years 2008 to 2011. The sample is based
on 30 firms in Europe and America, respectively, and is chosen after the number of
outstanding CDS contracts in November 2012. In order to get as accurate results as
possible, the selection of firms are separated into financial and non-financial sectors:
... (More) - Prior articles and reports have named Credit Default Swap (CDS) spreads as a
plausible indicator of default risk. In this report, the authors present a significant
correlation between CDS spreads and two other more acknowledged methods of
measuring default risk probabilities; the modified Merton model and credit ratings
from the rating institute Moody’s. The tests are implemented by Spearman’s rank
correlation with data obtained between the years 2008 to 2011. The sample is based
on 30 firms in Europe and America, respectively, and is chosen after the number of
outstanding CDS contracts in November 2012. In order to get as accurate results as
possible, the selection of firms are separated into financial and non-financial sectors:
five financial and 25 non-financial firms, respectively for each continent. The CDS
spreads are obtained from 5-year maturity contracts and are taken from Thomson
Reuters DataStream. The variables needed to calculate the modified Merton are
obtained from the same source as well as from comprehensive Excel files provided by
professor Aswath Damodaran at NY University. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/3458286
- author
- Wedin, Johannes LU and Severinsson, Christian
- supervisor
-
- Hans Byström LU
- organization
- course
- NEKH01 20122
- year
- 2013
- type
- M2 - Bachelor Degree
- subject
- keywords
- Credit Default Swaps, CDS spreads, credit ratings, Moody’s, the modified Merton model, risk assessment, measuring credit risk
- language
- English
- id
- 3458286
- date added to LUP
- 2013-02-13 11:09:47
- date last changed
- 2013-02-13 11:09:47
@misc{3458286, abstract = {{Prior articles and reports have named Credit Default Swap (CDS) spreads as a plausible indicator of default risk. In this report, the authors present a significant correlation between CDS spreads and two other more acknowledged methods of measuring default risk probabilities; the modified Merton model and credit ratings from the rating institute Moody’s. The tests are implemented by Spearman’s rank correlation with data obtained between the years 2008 to 2011. The sample is based on 30 firms in Europe and America, respectively, and is chosen after the number of outstanding CDS contracts in November 2012. In order to get as accurate results as possible, the selection of firms are separated into financial and non-financial sectors: five financial and 25 non-financial firms, respectively for each continent. The CDS spreads are obtained from 5-year maturity contracts and are taken from Thomson Reuters DataStream. The variables needed to calculate the modified Merton are obtained from the same source as well as from comprehensive Excel files provided by professor Aswath Damodaran at NY University.}}, author = {{Wedin, Johannes and Severinsson, Christian}}, language = {{eng}}, note = {{Student Paper}}, title = {{Measuring credit risk: The relation between CDS Spreads, the modified Merton model and credit ratings}}, year = {{2013}}, }