This paper investigates the determinants of the default risk premia embedded in the European credit default swap spreads. Using a modified version of the intertemporal capital asset pricing model, we show that default risk premia represent compensation for bearing exposure to systematic risk and...

We investigate the risk of holding credit default swaps(CDS) in the trading book and compare the Value at Risk (VaR) of a CDS position to the VaR for investing in the respective firm’s equity using a sample of CDS – stock price pairs for 86 actively traded firms over the period from March...

This study calibrates the term structure of risk premia before and during the 2007/2008 financial crisis using a new calibration approach based on credit default swaps. The risk premium term structure was flat before the crisis and downward sloping during the crisis. The instantaneous risk...

Credit risk models should reflect the observation that the relevant value of collateral is generally not the average value of the asset over all possible states of nature. In most cases, the relevant value of collateral for the lender is its secondary market value in bad states of nature, where...

The payoff of many credit derivatives depends on the level of credit spreads. Inparticular, credit derivatives with a leverage component are subject to gap risk, a riskassociated with the occurrence of jumps in the underlying credit default swaps. Inthe framework of first passage time models, we...

Research papers in empirical finance and financial econometrics are among the most widely cited, downloaded and viewed articles in the discipline of Finance. The special issue presents several papers by leading scholars in the field on “Recent Developments in Financial Economics and...

We investigate the problem of modeling defaults of dependent credits.In the framework of the class of structural default models we studythreshold models where for each credit the underling ability-to-payprocess is a transformation of a Wiener processes. We propose a modelfor dependent defaults...

We study the risk of holding credit default swaps (CDS) in the trading book. In particular, wecompare the Value at Risk (VaR) of a CDS position to the VaR for investing in the respectivefirm’s equity. Our sample consists of CDS – stock price pairs for 86 actively traded firms overthe period...

We provide a comprehensive analysis of the determinants of trading in the sovereign credit default swaps (CDS) market, using weekly data for single-name sovereign CDS from October 2008 to September 2015. We describe the anatomy of the sovereign CDS market, derive a law of motion for gross...

The ground-breaking Black-Scholes-Merton model has brought about a generation of derivative pricing models that have been successfully applied in the financial industry. It has been a long standing puzzle that the structural models of credit risk, as an application of the same modeling paradigm,...