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Flexing the default barrier
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Dorfleitner, Gregor, Schneider, Paul and Veža, Tanja. (2011) Flexing the default barrier. Quantitative Finance, Vol.11 (No.12). pp. 1729-1743. ISSN 1469-7688
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Official URL: http://dx.doi.org/10.1080/14697688.2010.481633
Abstract
The paper introduces a Black–Cox-type structural model for credit default swaps (CDS). The existing literature on structural CDS pricing is extended by allowing a general functional form for the default barrier specified without reference to asset volatilities, dividend yields or interest rates. We develop a fast and robust algorithm to compute survival probabilities numerically. An empirical application suggests that the market-implied barrier is stable over time, with a possibly hump-shaped term structure. The implied barrier can be used for computing survival probabilities consistent with objective expectations of asset evolution, for pricing under counterparty risk, and for determining optimal corporate bond covenants.
| Item Type: | Journal Article |
|---|---|
| Subjects: | H Social Sciences > HG Finance |
| Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
| Journal or Publication Title: | Quantitative Finance |
| Publisher: | IOP Publishing |
| ISSN: | 1469-7688 |
| Date: | 2011 |
| Volume: | Vol.11 |
| Number: | No.12 |
| Number of Pages: | 15 |
| Page Range: | pp. 1729-1743 |
| Identification Number: | 10.1080/14697688.2010.481633 |
| Status: | Peer Reviewed |
| Publication Status: | Published |
| Access rights to Published version: | Restricted or Subscription Access |
| URI: | http://wrap.warwick.ac.uk/id/eprint/44861 |
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