Merton's Model Explaining CDS Spreads - a panel data study of OMX Stockholm traded firms
(2013) NEKN01 20131Department 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.
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/3807351
- author
- Gustafson, Sandra Li LU and Milu, Radu Mihai LU
- supervisor
- organization
- course
- NEKN01 20131
- year
- 2013
- 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}}, language = {{eng}}, note = {{Student Paper}}, title = {{Merton's Model Explaining CDS Spreads - a panel data study of OMX Stockholm traded firms}}, year = {{2013}}, }