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http://ssrn.com/abstract=687203
 
 

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Default and Recovery Implicit in the Term Structure of Sovereign CDS Spreads


Kenneth J. Singleton


Stanford University-Graduate School of Business

Jun Pan


Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA); National Bureau of Economic Research (NBER); China Academy of Financial Research (CAFR)


AFA 2006 Boston Meetings Paper

Abstract:     
This paper explores in depth the nature of the risk-neutral credit-event intensities (lambda^Q) that best describe the term structures of sovereign CDS spreads. We examine three distinct families of stochastic processes: the square-root, lognormal, and three-halves processes. These models employ different specifications of mean reversions and time-varying volatilities to fit both the distributions of spreads, and the variation over time in the shapes of the term structures of spreads. We find that these models imply very different risk-neutral probabilities that a sovereign issuer will survive over various future horizons. We also explore the use of the term structure of CDS spreads to separately identify both the loss rate in the event of default, L^Q, and the parameters of the process lambda^Q. Finally, we to attempt to shed some light on the magnitudes of default-event risk premia in sovereign markets.

working papers series


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Date posted: March 24, 2005  

Suggested Citation

Singleton, Kenneth J. and Pan, Jun, Default and Recovery Implicit in the Term Structure of Sovereign CDS Spreads. AFA 2006 Boston Meetings Paper. Available at SSRN: http://ssrn.com/abstract=687203 or http://dx.doi.org/10.2139/ssrn.687203

Contact Information

Kenneth J. Singleton
Stanford University-Graduate School of Business ( email )
Knight Management Center
655 Knight Way
Stanford, CA 94305-7298
United States
650-723-5753 (Phone)
HOME PAGE: http://www.stanford.edu/~kenneths
Jun Pan (Contact Author)
Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA) ( email )
77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States
617-253-3083 (Phone)
617-258-6855 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
China Academy of Financial Research (CAFR)
1954 Huashan Road
Shanghai P.R.China, 200030
China

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