Estimating credit default swap spreads from equity data

Kooverjee, Jateen

Estimating credit default swap spreads from equity data

Master Thesis

2014

Publisher

University of Cape Town

Department

Division of Actuarial Science

Faculty

Faculty of Commerce

Abstract

Corporate bonds are an attractive form of investment as they provide higher returns than government bonds. This increase in returns is usually associated with an increase in risk. These risks include liquidity, market and credit risk. This dissertation will focus on the modelling of a corporate bond's credit risk by considering how to estimate the credit default swap (CDS) spread of a firm's bond. A structural credit model will be used to do this. In this dissertation, we implement an extension of Merton's model by Hull, Nelken and White (2004), which is based on the use of the implied volatilities of options on the company's stock to estimate model parameters. Such an approach provides an insight into the relationship between credit markets and options markets.

Description

Includes bibliographical references.

Keywords

Mathematical Finance

Reference:

Collections

Masters

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