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Title:Default dependence: The equity default relationship PDF Logo
Authors:Turnbull, Stuart M.
Yang, Jun
Issue Date:2008
Series/Report no.:Bank of Canada Working Paper 2008,1
Abstract:The paper examines three equity-based structural models to study the nonlinear relationship between equity and credit default swap (CDS) prices. These models differ in the specification of the default barrier. With cross-firm CDS premia and equity information, we are able to estimate and compare the three models. We find that the stochastic barrier model performs better than the constant and uncertain barrier models in terms of both in-sample fit and out-of-sample forecasting of CDS premia. In addition, we demonstrate a linkage between the default barrier, jump intensity, and barrier volatility estimated from our models and firm-specific variables related to default risk, such as credit ratings, equity volatility, and leverage ratios.
Subjects:Econometric and statistical methods
Financial markets
JEL:G12
G13
Document Type:Working Paper
Appears in Collections:Bank of Canada Working Papers

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