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Valuing Credit Default Swaps with a Structural Approach

Möller, Per LU (2015) FMS820 20151
Mathematical Statistics
Abstract
Valuing single-name Credit Default Swaps (CDS) is a dicult task since in order
to make a fair valuation, one needs to assess the credit risk of the corresponding
company. Many dierent models exist when it comes to modelling the credit
risk, this report specically focuses on the branch of models named structural
models. The aim of this thesis is to, for a number of companies, model the CDSspreads
given by the market by rst modelling the credit risk of the company in
the aforementioned models, and then using key metrics calculated in the models
to value the corresponding CDS-contract.
A couple of dierent models are tested with dierent sets of key parameters,
and the results show that a certain implementation of the Black-Cox model
... (More)
Valuing single-name Credit Default Swaps (CDS) is a dicult task since in order
to make a fair valuation, one needs to assess the credit risk of the corresponding
company. Many dierent models exist when it comes to modelling the credit
risk, this report specically focuses on the branch of models named structural
models. The aim of this thesis is to, for a number of companies, model the CDSspreads
given by the market by rst modelling the credit risk of the company in
the aforementioned models, and then using key metrics calculated in the models
to value the corresponding CDS-contract.
A couple of dierent models are tested with dierent sets of key parameters,
and the results show that a certain implementation of the Black-Cox model
produces best results, which also happens to be the model with the most realworld
like features. The model manages to follow both major changes in the
CDS-spreads, as well as minor changes. The corresponding residuals show some
stationarity-features and are slightly improved when adjusting for the current
level of volatility, however, they do not appear to be white noise as corresponding
SACF-plots show clear correlation for many lags. The Black-Cox model also
proves to be better than a simple regression model, used as a benchmark. (Less)
Please use this url to cite or link to this publication:
author
Möller, Per LU
supervisor
organization
course
FMS820 20151
year
type
H2 - Master's Degree (Two Years)
subject
language
English
id
7358823
date added to LUP
2015-06-16 15:13:20
date last changed
2015-06-18 15:32:37
@misc{7358823,
  abstract     = {Valuing single-name Credit Default Swaps (CDS) is a dicult task since in order
to make a fair valuation, one needs to assess the credit risk of the corresponding
company. Many dierent models exist when it comes to modelling the credit
risk, this report specically focuses on the branch of models named structural
models. The aim of this thesis is to, for a number of companies, model the CDSspreads
given by the market by rst modelling the credit risk of the company in
the aforementioned models, and then using key metrics calculated in the models
to value the corresponding CDS-contract.
A couple of dierent models are tested with dierent sets of key parameters,
and the results show that a certain implementation of the Black-Cox model
produces best results, which also happens to be the model with the most realworld
like features. The model manages to follow both major changes in the
CDS-spreads, as well as minor changes. The corresponding residuals show some
stationarity-features and are slightly improved when adjusting for the current
level of volatility, however, they do not appear to be white noise as corresponding
SACF-plots show clear correlation for many lags. The Black-Cox model also
proves to be better than a simple regression model, used as a benchmark.},
  author       = {Möller, Per},
  language     = {eng},
  note         = {Student Paper},
  title        = {Valuing Credit Default Swaps with a Structural Approach},
  year         = {2015},
}