A Simple Non-Parametric Approach to the Term Structure and Time Decomposition of Credit Default Swap Spreads

53 Pages Posted: 20 Jul 2022 Last revised: 7 Jun 2023

See all articles by Santiago Forte

Santiago Forte

ESADE Business School, Ramon Llull University

Date Written: November 11, 2021

Abstract

This study introduces a simple non-parametric approach to pricing credit default swaps (CDS) and other single-name credit-risky securities. The method relies exclusively on closed-form solutions, allows any term structure of CDS spreads to be reproduced, and implies lower pricing errors than conventional models. The study extends the theme by providing an equally simple and intuitive approach to the time decomposition of CDS spreads, which is similar to, but also remarkably different from the traditional decomposition of spot risk-free rates into forward rates. The overall research conclusions are supported by a case study of the Eurozone sovereign debt crisis.

Keywords: No-arbitrage credit risk pricing, term structure of CDS spreads, spot and forward CDS contracts

JEL Classification: G12, G13, G14

Suggested Citation

Forte, Santiago, A Simple Non-Parametric Approach to the Term Structure and Time Decomposition of Credit Default Swap Spreads (November 11, 2021). Available at SSRN: https://ssrn.com/abstract=4158338 or http://dx.doi.org/10.2139/ssrn.4158338

Santiago Forte (Contact Author)

ESADE Business School, Ramon Llull University ( email )

Av. Torreblanca 59
Sant Cugat del Vallès, Barcelona 08172
Spain

HOME PAGE: http://www.santiagoforte.com

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