Modeling the CDS Prices: An application to the MENA Region

Date

2017-01-05

Author

Namuslu, Merve
Ayaydın Hacıömeroğlu, Hande
Danışoğlu, Seza

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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 advantages of such models in terms of being more flexible, practical and tractable. In model calibration, each sample country’s bond price is used while determining the optimal set of parameters for the CIR default intensity process. For this purpose, the country’s stochastic default probabilities are estimated within the least squares framework. Data on six MENA countries, are used in the analyses. The term structure of daily sovereign debt prices that are used to estimate the hazard rate parameters and the daily prices of the country CDS contracts that are used to test the success of the model are obtained from Thomson Reuters. The model’s success is tested over 3 month time period between April and June 2016. The proxy for the risk-free interest rate is the federal funds rates.

Subject Keywords

CIR model, Credit default swap, Intensity-based model, Default intensity, Survival probability, Probability of default

URI

https://hdl.handle.net/11511/75041
https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=MEEA17&paper_id=141

Conference Name

Thirty-seventh Annual Meeting of The Middle East Economic Association (MEEA), (05 Ocak 2017)

Collections

Department of Business Administration, Conference / Seminar

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Citation Formats

M. Namuslu, H. Ayaydın Hacıömeroğlu, and S. Danışoğlu, “Modeling the CDS Prices: An application to the MENA Region,” presented at the Thirty-seventh Annual Meeting of The Middle East Economic Association (MEEA), (05 Ocak 2017), Chicago, USA, 2017, Accessed: 00, 2021. [Online]. Available: https://hdl.handle.net/11511/75041.