Credit default swap valuation: an application via stochastic intensity models

Download

index.pdf

Date

2016

Author

Namuslu, Merve

Metadata

Show full item record

Item Usage Stats

189
views

680
downloads

The objective of this thesis is to study the pricing of a single-name credit default swap (CDS) contract via the discounted cash flow method with reduced-form survival probability functions depending on stochastic intensity. The ability of the model in predicting the market-observed spreads is tested as well by using bond and CDS data from the US market. In credit risk modeling, the CIR (Cox-Ingersoll-Ross) model is used. The main reason for using a reduced-form model in pricing the CDS contracts is the advantages of such models in terms of being more flexible, practical and tractable. In model calibration, each sample firm’s bond price is used while determining the optimal set of parameters for the CIR default intensity process. For this purpose, the firm’s stochastic default probabilities are estimated within the least squares framework. Data on two of the Dow Jones 30 Index constituents, the Coca-Cola Company and JPMorgan Chase, are used in the analyses. The term structure of daily bond prices that are used to estimate the hazard rate parameters and the daily prices of the firms’ CDS contracts that are used to test the success of the model are obtained from Thomson Reuters. The model’s success is tested over two distinct time periods. The first period is from July 2008 to September 2008 (pre-crisis) and the second period is from January 2016 to March 2016 (post-crisis). The proxy for the risk-free interest rate is the federal funds rates.

Subject Keywords

Credit analysis., Swaps (Finance)., Credit

URI

http://etd.lib.metu.edu.tr/upload/12620208/index.pdf
https://hdl.handle.net/11511/25834

Collections

Graduate School of Applied Mathematics, Thesis

Suggestions

OpenMETU
Core

Modeling the CDS Prices: An application to the MENA Region Namuslu, Merve; Ayaydın Hacıömeroğlu, Hande; Danışoğlu, Seza (2017-01-05) The objective of this paper is to study the pricing of a single-name credit default swap (CDS) contract via the discounted cash flow method with reduced-form survival probability functions depending on stochastic intensity. The ability of the model in predicting the market-observed spreads is tested as well by using bond and CDS data of MENA countries. In credit risk modeling, the CIR (Cox-Ingersoll-Ross) model is used. The main reason for using a reduced-form model in pricing the CDS contracts is the advan...
Credit scoring methods and accuray ratio İşcanoğlu, Ayşegül; Körezlioğlu, Hayri; Department of Financial Mathematics (2005) The credit scoring with the help of classification techniques provides to take easy and quick decisions in lending. However, no definite consensus has been reached with regard to the best method for credit scoring and in what conditions the methods performs best. Although a huge range of classification techniques has been used in this area, the logistic regression has been seen an important tool and used very widely in studies. This study aims to examine accuracy and bias properties in parameter estimation ...
Stochastic credit default swap pricing Gökgöz, İsmail Hakkı; Uğur, Ömür; Yolcu Okur, Yeliz; Department of Financial Mathematics (2012) Credit risk measurement and management has great importance in credit market. Credit derivative products are the major hedging instruments in this market and credit default swap contracts (CDSs) are the most common type of these instruments. As observed in credit crunch (credit crisis) that has started from the United States and expanded all over the world, especially crisis of Iceland, CDS premiums (prices) are better indicative of credit risk than credit ratings. Therefore, CDSs are important indicators f...
Pricing and hedging of constant proportion debt obligations İşcanoğlu Çekiç, Ayşegül; Uğur, Ömür; Korn, Ralf; Department of Financial Mathematics (2011) A Constant Proportion Debt Obligation is a credit derivative which has been introduced to generate a surplus return over a riskless market return. The surplus payments should be obtained by synthetically investing in a risky asset (such as a credit index) and using a linear leverage strategy which is capped for bounding the risk. In this thesis, we investigate two approaches for investigation of constant proportion debt obligations. First, we search for an optimal leverage strategy which minimises the mean-...
Credit risk modeling with stochastic volatility, jumps and stochastic interest rates Yüksel, Ayhan; Akyıldız, Ersan; Department of Financial Mathematics (2007) This thesis presents the modeling of credit risk by using structural approach. Three fundamental questions of credit risk literature are analyzed throughout the research: modeling single firm credit risk, modeling portfolio credit risk and credit risk pricing. First we analyze these questions under the assumptions that firm value follows a geometric Brownian motion and the interest rates are constant. We discuss the weaknesses of the geometric brownian motion assumption in explaining empirical properties of...

Citation Formats

M. Namuslu, “Credit default swap valuation: an application via stochastic intensity models,” M.S. - Master of Science, Middle East Technical University, 2016.