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Evaluating Credit Default Swap spreads using the CreditGrades model - A study on European non-financial firms

Melin, Jakob LU and Pappa, Stamatoula LU (2015) NEKP03 20151
Department of Economics
Abstract
In our paper, we analyse Credit Default Swaps (CDSs) for 67 European non-financial companies between December 2004 and December 2014, focusing on the five-year maturity corporate CDS spreads. The period of analysis is divided into three sub-periods; before the financial crisis, during the global financial crisis and the European sovereign debt crisis. The CreditGrades model is used to estimate CDS spreads where the volatility is estimated by two different methods; a Moving Average (MA) and a Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model. The empirically observed spreads are compared with the predicted CDS spreads. Our findings suggest that the estimation of volatility with the MA approach performs better than the... (More)
In our paper, we analyse Credit Default Swaps (CDSs) for 67 European non-financial companies between December 2004 and December 2014, focusing on the five-year maturity corporate CDS spreads. The period of analysis is divided into three sub-periods; before the financial crisis, during the global financial crisis and the European sovereign debt crisis. The CreditGrades model is used to estimate CDS spreads where the volatility is estimated by two different methods; a Moving Average (MA) and a Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model. The empirically observed spreads are compared with the predicted CDS spreads. Our findings suggest that the estimation of volatility with the MA approach performs better than the GARCH model. Furthermore, trading strategies are implemented seeking positive returns on the CDS market. The best performing strategies are based on the autocorrelation of the observed CDS spreads. (Less)
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author
Melin, Jakob LU and Pappa, Stamatoula LU
supervisor
organization
course
NEKP03 20151
year
type
H2 - Master's Degree (Two Years)
subject
keywords
GARCH, trading strategies., CreditGrades Model, credit default swap (CDS), credit risk
language
English
id
7363147
date added to LUP
2015-06-29 13:04:00
date last changed
2015-06-29 13:04:00
@misc{7363147,
  abstract     = {In our paper, we analyse Credit Default Swaps (CDSs) for 67 European non-financial companies between December 2004 and December 2014, focusing on the five-year maturity corporate CDS spreads. The period of analysis is divided into three sub-periods; before the financial crisis, during the global financial crisis and the European sovereign debt crisis. The CreditGrades model is used to estimate CDS spreads where the volatility is estimated by two different methods; a Moving Average (MA) and a Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model. The empirically observed spreads are compared with the predicted CDS spreads. Our findings suggest that the estimation of volatility with the MA approach performs better than the GARCH model. Furthermore, trading strategies are implemented seeking positive returns on the CDS market. The best performing strategies are based on the autocorrelation of the observed CDS spreads.},
  author       = {Melin, Jakob and Pappa, Stamatoula},
  keyword      = {GARCH,trading strategies.,CreditGrades Model,credit default swap (CDS),credit risk},
  language     = {eng},
  note         = {Student Paper},
  title        = {Evaluating Credit Default Swap spreads using the CreditGrades model - A study on European non-financial firms},
  year         = {2015},
}