An Empirical Investigation of CDS Spreads Using a Regime Switching Default Risk Model

An Empirical Investigation of CDS Spreads Using a Regime Switching Default Risk Model

Default risk in equity returns can be measured by structural models of default. In this paper we propose a credit warning signal (CWS) based on the Merton default risk (MDR) model and a Regime-switching default risk (RSDR) model. The RSDR model is a generalization of the MDR model, comprises regime-...

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Main Author: Milidonis, Andreas
Other Authors: Nanyang Business School
Format: Article
Language:English
Published: 2016
Subjects:
Default Risk
Regime Switching
Online Access:https://hdl.handle.net/10356/82331
http://hdl.handle.net/10220/41179
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Institution: Nanyang Technological University
Language: English
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spelling sg-ntu-dr.10356-823312023-05-19T06:44:43Z An Empirical Investigation of CDS Spreads Using a Regime Switching Default Risk Model Milidonis, Andreas Nanyang Business School Default Risk Regime Switching Default risk in equity returns can be measured by structural models of default. In this paper we propose a credit warning signal (CWS) based on the Merton default risk (MDR) model and a Regime-switching default risk (RSDR) model. The RSDR model is a generalization of the MDR model, comprises regime-switching asset distribution dynamics and thus produces more realistic default probability estimates in cases of deteriorating credit quality. Alternatively, it reduces to the MDR model. Using the dataset of US credit default swap (CDS) contracts we construct rating based indices to investigate the MDR and RSDR implied probabilities of default in relation to the market-observed CDS spreads. The proposed CWS measure indicates an increase in default probabilities several months ahead of notable increases in CDS spreads. Accepted version 2016-08-26T04:28:18Z 2019-12-06T14:53:29Z 2016-08-26T04:28:18Z 2019-12-06T14:53:29Z 2016 Journal Article Milidonis, A. (2016). An Empirical Investigation of CDS Spreads Using a Regime Switching Default Risk Model. North American Actuarial Journal, 20(3), 252-275. 1556-5068 https://hdl.handle.net/10356/82331 http://hdl.handle.net/10220/41179 10.1080/10920277.2016.1180996 en North American Actuarial Journal © 2016 Society of Actuaries. This is the author created version of a work that has been peer reviewed and accepted for publication by North American Actuarial Journal, Society of Actuaries. It incorporates referee’s comments but changes resulting from the publishing process, such as copyediting, structural formatting, may not be reflected in this document. The published version is available at: http://dx.doi.org/10.1080/10920277.2016.1180996. 41 p. application/pdf
institution Nanyang Technological University
building NTU Library
continent Asia
country Singapore
Singapore
content_provider NTU Library
collection DR-NTU
language English
topic Default Risk
Regime Switching
spellingShingle Default Risk
Regime Switching
Milidonis, Andreas
An Empirical Investigation of CDS Spreads Using a Regime Switching Default Risk Model
description Default risk in equity returns can be measured by structural models of default. In this paper we propose a credit warning signal (CWS) based on the Merton default risk (MDR) model and a Regime-switching default risk (RSDR) model. The RSDR model is a generalization of the MDR model, comprises regime-switching asset distribution dynamics and thus produces more realistic default probability estimates in cases of deteriorating credit quality. Alternatively, it reduces to the MDR model. Using the dataset of US credit default swap (CDS) contracts we construct rating based indices to investigate the MDR and RSDR implied probabilities of default in relation to the market-observed CDS spreads. The proposed CWS measure indicates an increase in default probabilities several months ahead of notable increases in CDS spreads.
author2 Nanyang Business School
author_facet Nanyang Business School
Milidonis, Andreas
format Article
author Milidonis, Andreas
author_sort Milidonis, Andreas
title An Empirical Investigation of CDS Spreads Using a Regime Switching Default Risk Model
title_short An Empirical Investigation of CDS Spreads Using a Regime Switching Default Risk Model
title_full An Empirical Investigation of CDS Spreads Using a Regime Switching Default Risk Model
title_fullStr An Empirical Investigation of CDS Spreads Using a Regime Switching Default Risk Model
title_full_unstemmed An Empirical Investigation of CDS Spreads Using a Regime Switching Default Risk Model
title_sort empirical investigation of cds spreads using a regime switching default risk model
publishDate 2016
url https://hdl.handle.net/10356/82331
http://hdl.handle.net/10220/41179
_version_ 1770565208826183680

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