Measuring Default Risk Premia from Default Swap Rates and EDFs

56 Pages Posted: 20 Sep 2007

See all articles by Antje Berndt

Antje Berndt

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Applied Statistics

Rohan Douglas

Cornell University

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER)

Mark Ferguson

Independent

David Schranz

Cornell University

Abstract

This paper estimates recent default risk premia for U.S. corporate debt, based on a close relationship between default probabilities, as estimated by Moody's KMV EDFs, and default swap (CDS) market rates. The default-swap data, obtained through CIBC from 22 banks and specialty dealers, allow us to establish a strong link between actual and risk-neutral default probabilities for the 69 firms in the three sectors that we analyze: broadcasting and entertainment, healthcare, and oil and gas. We find dramatic variation over time in risk premia, from peaks in the third quarter of 2002, dropping by roughly 50% to late 2003.

Suggested Citation

Berndt, Antje and Douglas, Rohan and Duffie, James Darrell and Ferguson, Mark and Schranz, David, Measuring Default Risk Premia from Default Swap Rates and EDFs. BIS Working Paper No. 173; EFA 2004 Maastricht Meetings Paper No. 5121. Available at SSRN: https://ssrn.com/abstract=556080 or http://dx.doi.org/10.2139/ssrn.556080

Antje Berndt (Contact Author)

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Applied Statistics ( email )

Canberra, ACT 0200
Australia

HOME PAGE: http://www.cbe.anu.edu.au/about/staff-directory/?profile=Antje-Berndt

Rohan Douglas

Cornell University

Ithaca, NY 14853
United States

James Darrell Duffie

Stanford University - Graduate School of Business ( email )

655 Knight Way
Knight Management Center
Stanford, CA 94305-7298
United States
650-723-1976 (Phone)
650-725-8916 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mark Ferguson

Independent

No Address Available

David Schranz

Cornell University

Ithaca, NY 14853
United States

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