What Drives the Difference in Probability of Default from Reduced Form and Structural Approaches
(2014) FMS820 20141Mathematical 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 loglinear 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 loglinear 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:
http://lup.lub.lu.se/studentpapers/record/4457539
 author
 Larsson, Madelene and Ädel, Albin
 supervisor

 Erik Lindström ^{LU}
 organization
 course
 FMS820 20141
 year
 2014
 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
 20140604 10:10:11
 date last changed
 20140604 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 loglinear 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}, }