Pricing Default Swaps: Empirical Evidence

49 Pages Posted: 24 Dec 2001

See all articles by Patrick Houweling

Patrick Houweling

Robeco Asset Management

Ton Vorst

VU University Amsterdam - Department of Finance and Financial Sector Management; Tinbergen Institute


In this paper we compare market prices of credit default swaps with model prices. We show that a simple reduced form model with a constant recovery rate outperforms the market practice of directly comparing bonds' credit spreads to default swap premiums. We find that the model works well for investment grade credit default swaps, but only if we use swap or repo rates as proxy for default-free interest rates. This indicates that the government curve is no longer seen as the reference default-free curve. We also show that the model is insensitive to the value of the assumed recovery rate.

Keywords: credit default swaps, credit derivatives, credit risk, default risk, risk-neutral valuation, default-free interest rates

JEL Classification: G12, G13, C13

Suggested Citation

Houweling, Patrick and Vorst, Ton A.C.F., Pricing Default Swaps: Empirical Evidence. Journal of International Money and Finance, Vol. 24, pp. 1200-1225, 2005, EFA 2002 Berlin Meetings Presented Paper, EFMA 2002 London Meetings, ERIM Report Series, Available at SSRN: or

Patrick Houweling (Contact Author)

Robeco Asset Management ( email )

Weena 850
Rotterdam, 3014 DA
+31-10-2243538 (Phone)


Ton A.C.F. Vorst

VU University Amsterdam - Department of Finance and Financial Sector Management ( email )

De Boelelaan 1105
NL-1081HV Amsterdam

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS

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