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Merton's Model Explaining CDS Spreads - a panel data study of OMX Stockholm traded firms

Gustafson, Sandra Li LU and Milu, Radu Mihai LU (2013) NEKN01 20131
Department of Economics
Abstract
Credit risk arises in almost all financial activities. One way to hedge and trade risk is to use Credit Default Swaps that act like an insurance against credit events. The value of the CDS is related to the probability of the reference entity defaulting. In this paper we aimed to determine how well the variables implied by the Merton model explain the CDS spread. A panel data study of 16 companies belonging to the OMX Stockholm equity index shows that the variables have limited explanatory power. An increasing stock return is narrowing the credit default swap spread, but the time dummies account for most of the variation.
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author
Gustafson, Sandra Li LU and Milu, Radu Mihai LU
supervisor
organization
course
NEKN01 20131
year
type
H1 - Master's Degree (One Year)
subject
keywords
Credit Risk, Credit Default Swap, CDS spread, Merton model, OMX Stockholm
language
English
id
3807351
date added to LUP
2013-06-20 10:46:05
date last changed
2013-06-20 10:46:05
@misc{3807351,
  abstract     = {Credit risk arises in almost all financial activities. One way to hedge and trade risk is to use Credit Default Swaps that act like an insurance against credit events. The value of the CDS is related to the probability of the reference entity defaulting. In this paper we aimed to determine how well the variables implied by the Merton model explain the CDS spread. A panel data study of 16 companies belonging to the OMX Stockholm equity index shows that the variables have limited explanatory power. An increasing stock return is narrowing the credit default swap spread, but the time dummies account for most of the variation.},
  author       = {Gustafson, Sandra Li and Milu, Radu Mihai},
  keyword      = {Credit Risk,Credit Default Swap,CDS spread,Merton model,OMX Stockholm},
  language     = {eng},
  note         = {Student Paper},
  title        = {Merton's Model Explaining CDS Spreads - a panel data study of OMX Stockholm traded firms},
  year         = {2013},
}