Pricing CDX Credit Default Swaps Using the Hull-White Model

Abstract

We apply the Hull and White (2000) model with its standard intensity and its approximate no-arbitrage valuation approach to the pricing of credit default swaps (CDSs). Based on a representative sample of individual obligors from the DJ CDX.NA.IG index universe, we evaluate the pricing performance using an overall of 63,460 quotes during the period January 1, 2002 to July 7, 2006. Given that liquid bond data are available, both valuation approaches on average provide satisfying results as measured by spread change correlations and pricing error statistics. Testing for cointegration of spreads generally confirms a stable pricing relationship. However, in about 25 percent of our sample obligors the model is obviously weak. Comparing the results to those of Stewart and Wagner (2008) tentatively suggests that, on average, the Hull-White model is not dominated by CreditGrades or trinomial trees.

Keywords: CDS pricing, Hull-White model

JEL Classification: C52, G13