Intro -- Contents -- I. INTRODUCTION -- II. DESCRIPTION OF THE INDICATOR -- III. MODEL DESCRIPTION -- IV. DATA DESCRIPTION -- V. FACTOR ANALYSIS: ESTIMATION RESULTS -- VI. COMPUTATION OF THE PROBABILITIES OF DEFAULT -- VII. SENSITIVITY ANALYSIS -- VIII. STRESS TESTING -- IX. CONCLUDING REMARKS...

Intro -- Contents -- I. INTRODUCTION -- II. CDS VALUATION AND THE BASIS -- III. THE ROLE OF RECOVERY -- IV. DATA ANALYSIS -- V. IMPLIED RECOVERY VALUES UNDER NO ARBITRAGE -- VI. IMPLIED RECOVERY VALUES UNDER NO ARBITRAGE WITH CTD -- VII. CONCLUSIONS -- REFERENCES.

Credit Default Swap spreads have been used as a leading indicator of distress. Default probabilities can be extracted from CDS spreads, but during distress it is important to take account of the stochastic nature of recovery value. The recent episodes of Landbanski, WAMU and Lehman illustrate...