Pricing Credit Default Swaps with Observable Covariates

• 成果类型: Article
• 署名作者: Doshi, Hitesh; Ericsson, Jan; Jacobs, Kris; Turnbull, Stuart M.
• 署名单位: University of Houston System; University of Houston; McGill University; Tilburg University
• 刊物名称: REVIEW OF FINANCIAL STUDIES
• ISSN/ISSBN: 0893-9454
• DOI: 10.1093/rfs/hht015
• 发表日期: 2013
• 页码: 2048
• 关键词: term structure; corporate-debt; RISK; determinants; SPREAD; models; volatility; bankruptcy; securities

摘要

Observable covariates are useful for predicting default, but several studies question their value for explaining credit spreads. We introduce a discrete-time no-arbitrage model with observable covariates, which allows for a closed-form solution for the value of credit default swaps (CDS). The default intensity is a quadratic function of the covariates, specified such that it is always positive. The model yields economically plausible results in terms of fit, the economic impact of the covariates, and the prices of risk. Risk premiums are large and account for a smaller percentage of spreads for firms with lower credit quality. Macroeconomic and firm-specific information can explain most of the variation in CDS spreads over time and across firms, even with a parsimonious specification. These findings resolve the existing disconnect in the literature regarding the value of observable covariates for credit risk pricing and default prediction.