Econometric Modelling of Stock Prices and CDS Spreads with Risk-Premiums (Presentation Slides)
Global Derivatives Trading Conference, Amsterdam, 2015
36 Pages Posted: 7 Sep 2017
Date Written: May 19, 2015
We present a dynamic model for the joint evolution of the balance sheet, equity stock price, and the credit default spread (CDS). We illustrate why the structural default model cannot explain the dynamics of CDS rates. We then introduce the credit risk-premium to model spikes in CDS rates during stressed market conditions. We develop the statistical evidence for the regime-switching dynamics in stock prices and CDS rates. Finally, we provide applications for balance sheet optimization (dividend and debt policy) and trading strategies (credit, high yield, convertibles).
Keywords: Credit risk, risk-premia, cyclicality risk, diversification
JEL Classification: G10, G11, G12
Suggested Citation: Suggested Citation