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| Tekijä: | Bedendo, M. Cathcart, L. El-Jahel, L. |
| Otsikko: | Market and model credit default swap spreads: mind the gap! |
| Lehti: | European Financial Management
2011 : SEP, VOL. 17:4, p. 655-678 |
| Asiasana: | financial management credit derivative securities equities stocks bonds models |
| Vapaa asiasana: | market value |
| Kieli: | eng |
| Tiivistelmä: | A relation across the fair values of various asset classes, that is, equity, bonds, and credit derivatives, referring to the same company is established by structural models. This paper explores whether a popular structural model, the CreditGrades approach proposed by Finger (2002), Stamicar and Finger (2005) is successful in explaining the dynamic relation btw. equity/option variables and Credit Default Swap (CDS) premia at individual company level. CDS model spreads are found to display a significant correlation with CDS market spreads. However, the gap btw. the two is time varying, widening markedly in times of financial turbulence. The analysis of the gap dynamics uncovers that this is partly due to i. episodes of decoupling btw. equity and credit markets, and ii. model's shortcomings. Finally, the model spreads are found to forecast market spreads. |
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