56 Pages Posted: 20 Sep 2007
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: Suggested Citation
Berndt, Antje and Douglas, Rohan and Duffie, 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