Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/25320 
Year of Publication: 
2009
Series/Report no.: 
SFB 649 Discussion Paper No. 2009,004
Publisher: 
Humboldt University of Berlin, Collaborative Research Center 649 - Economic Risk, Berlin
Abstract: 
This paper presents a new approach to deriving default intensities from CDS or bond spreads that yields smooth intensity curves required e.g. for pricing or risk management purposes. Assuming continuous premium or coupon payments, the default intensity can be obtained by solving an integral equation (Volterra equation of 2nd kind). This integral equation is shown to be equivalent to an ordinary linear differential equation of 2nd order with time dependent coefficients, which is numerically much easier to handle. For the special case of Nelson Siegel CDS term structure models, the problem permits a fully analytical solution. A very good and at the same time simple approximation to this analytical solution is derived, which serves as a recipe for easy implementation. Finally, it is shown how the new approach can be employed to estimate stochastic term structure models like the CIR model.
Subjects: 
CDS spreads
bond spreads
default intensity
credit derivatives pricing
spread risk modelling
credit risk modelling
loan book valuation
CIR model
JEL: 
C13
C20
C22
Document Type: 
Working Paper

Files in This Item:
File
Size
298.51 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.