Advanced

What Drives the Difference in Probability of Default from Reduced Form- and Structural Approaches

Larsson, Madelene and Ädel, Albin (2014) FMS820 20141
Mathematical Statistics
Abstract (Swedish)
This Master Thesis successfully explains the difference in probability of default implied
by Credit Default Swaps, traded by the market, and the benchmark Moody’s EDFTM. The
difference is explained by the market price of risk, related to the Girsanov kernel, allowing us
to transform the risk neutral measure Q to the physical measure P. This market price of risk
is modeled with a log-linear multivariate regression model combined with elastic net, using
market data. The predictability of the model is examined. The market price of risk is seen to
be mostly dependent on market sentiment, in front of firm specific factors and liquidity. The
analysis is made for AB Volvo, Stora Enso Oyj and TeliaSonera AB on data from 2006 - 2014.
The... (More)
This Master Thesis successfully explains the difference in probability of default implied
by Credit Default Swaps, traded by the market, and the benchmark Moody’s EDFTM. The
difference is explained by the market price of risk, related to the Girsanov kernel, allowing us
to transform the risk neutral measure Q to the physical measure P. This market price of risk
is modeled with a log-linear multivariate regression model combined with elastic net, using
market data. The predictability of the model is examined. The market price of risk is seen to
be mostly dependent on market sentiment, in front of firm specific factors and liquidity. The
analysis is made for AB Volvo, Stora Enso Oyj and TeliaSonera AB on data from 2006 - 2014.
The work was carried out at Swedbank. (Less)
Please use this url to cite or link to this publication:
author
Larsson, Madelene and Ädel, Albin
supervisor
organization
course
FMS820 20141
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Keywords: Credit Default Swaps, CDS, probability of default, reduced form model, market price of risk, risk neutral measure, physical measure, elastic net.
language
English
id
4457539
date added to LUP
2014-06-04 10:10:11
date last changed
2014-06-04 10:10:11
@misc{4457539,
  abstract     = {This Master Thesis successfully explains the difference in probability of default implied
by Credit Default Swaps, traded by the market, and the benchmark Moody’s EDFTM. The
difference is explained by the market price of risk, related to the Girsanov kernel, allowing us
to transform the risk neutral measure Q to the physical measure P. This market price of risk
is modeled with a log-linear multivariate regression model combined with elastic net, using
market data. The predictability of the model is examined. The market price of risk is seen to
be mostly dependent on market sentiment, in front of firm specific factors and liquidity. The
analysis is made for AB Volvo, Stora Enso Oyj and TeliaSonera AB on data from 2006 - 2014.
The work was carried out at Swedbank.},
  author       = {Larsson, Madelene and Ädel, Albin},
  keyword      = {Keywords: Credit Default Swaps,CDS,probability of default,reduced form model,market price of risk,risk neutral measure,physical measure,elastic net.},
  language     = {eng},
  note         = {Student Paper},
  title        = {What Drives the Difference in Probability of Default from Reduced Form- and Structural Approaches},
  year         = {2014},
}