Please use this identifier to cite or link to this item: https://hdl.handle.net/10356/82331
Title: An Empirical Investigation of CDS Spreads Using a Regime Switching Default Risk Model
Authors: Milidonis, Andreas
Keywords: Default Risk
Regime Switching
Issue Date: 2016
Source: Milidonis, A. (2016). An Empirical Investigation of CDS Spreads Using a Regime Switching Default Risk Model. North American Actuarial Journal, 20(3), 252-275.
Series/Report no.: North American Actuarial Journal
Abstract: Default risk in equity returns can be measured by structural models of default. In this paper we propose a credit warning signal (CWS) based on the Merton default risk (MDR) model and a Regime-switching default risk (RSDR) model. The RSDR model is a generalization of the MDR model, comprises regime-switching asset distribution dynamics and thus produces more realistic default probability estimates in cases of deteriorating credit quality. Alternatively, it reduces to the MDR model. Using the dataset of US credit default swap (CDS) contracts we construct rating based indices to investigate the MDR and RSDR implied probabilities of default in relation to the market-observed CDS spreads. The proposed CWS measure indicates an increase in default probabilities several months ahead of notable increases in CDS spreads.
URI: https://hdl.handle.net/10356/82331
http://hdl.handle.net/10220/41179
ISSN: 1556-5068
DOI: 10.1080/10920277.2016.1180996
Schools: Nanyang Business School 
Rights: © 2016 Society of Actuaries. This is the author created version of a work that has been peer reviewed and accepted for publication by North American Actuarial Journal, Society of Actuaries. It incorporates referee’s comments but changes resulting from the publishing process, such as copyediting, structural formatting, may not be reflected in this document. The published version is available at: http://dx.doi.org/10.1080/10920277.2016.1180996.
Fulltext Permission: open
Fulltext Availability: With Fulltext
Appears in Collections:NBS Journal Articles

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