Bootstrapping Credit Curves from CDS Spread Curves

Abstract

We present a simple procedure to construct credit curves by bootstrapping a hazard rate curve from observed CDS spreads. The hazard rate is assumed constant between subsequent CDS maturities. In order to link survival probabilities to market spreads, we use the JP Morgan model, a common market practice. We also derive approximate closed formulas for "cumulative" or "average" hazard rates and illustrate the procedure with examples from observed credit curves.

Keywords: hazard rates, risk-neutral hazard rates, risk-neutral default probabilities, CDS spread

JEL Classification: G13