Estimation of Default Probability and CDS Spread-Simulation on Taiwan''s Corporate Bond Market
Date Issued
2009
Date
2009
Author(s)
Lai, I-An
Abstract
CDS (Credit Default Swap) is a derivative based on the credit risk of all kinds of debt obligation. Although this product has already traded in European countries and United States for a few years, it is not yet authorized to be traded in Taiwan. But for the globally large traded volume, it is expected that CDS can be authorized in Taiwan in the future. Besides introducing the operation and the market condition of CDS, this research is major in integrating the CDS pricing formula and three kinds of default probability estimation models and computes the rational pricing of CDS which is based on the corporate bonds in Taiwan.This research used two kinds of structural form model, LS-LT, KMV, and a reduced form model, Poisson and exponential distribution model. The structural form model is to analyze the financial structure of the corporate to get the probability of default in a certain period. The reduced form model is to observe the market price of the bond to analyze the market judgement to the enterprise, and then predict the probability of default.his research set the corporate bonds in Taiwan as the reference entity of CDS contracts and set different maturity to compute the CDS pricing. Finally the result of computation from three models and the analysis of difference will be presented in the end of this article.
Subjects
CDS pricing
probability density function of default time
structural form model
reduced form model
lower bound of asset value
Type
thesis
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