Valuing Credit Default Swaps I

By John C. Hull, A. White. 2000

343 citations recorded by the source corpus.

One of the fastest growing areas of both derivatives trading and research right now is in contracts based on credit risk. The credit default swap is a standard instrument, offering the possibility of hedging against default by the issuer of an underlying bond. Several existing valuation methodologies differ in their assumptions about the payoff in case of a credit event. In this article, Hull and White present an approach based on the realistic assumption that the amount bondholders will claim in a default is based on the difference between the bond&’s post-default market value and its face value. An important contribution of this article is to use the term structure of risk-neutral implied default probabilities obtained from market prices for a set of bonds of the same issuer. The dependence of swap values on assumed recovery rates and the shape of the yield curve are explored.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/aa640e1d720cbdc6c61130da1ecc9578f9498109

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Citations in the corpus

Restructuring Risk in Credit Default Swaps: An Empirical Analysis (2007, neutral): “This is known as the “Recovery of Treasury” assumption (see, for example, Jarrow and Turnbull (1995)).”
An Empirical Comparison of Credit Spreads between the Bond Market and the Credit Default Swap Market (2006, neutral): “This method has been widely used in the pricing of credit default swaps, such as Acharya et al. (2002), Das (1995), Das and Sundaram (2000), Das et al. (2003), Duffie (1999), Hull and White (2000, 2001) , Jarrow and Yildirim (2002), Scho ¨ nbucher (2003) and many others.”
Has the CDS Market Influenced the Borrowing Cost of European Countries During the Sovereign Crisis (2012, positive): “Theoretically, in the absence of arbitrage opportunity, the CDS premium should be equal to the bond spread for the same borrower and maturity (Du e (1999), Hull, Predescu and White (2004) and Hull and White (2000)).”
Liaisons dangereuses: Increasing connectivity, risk sharing, and systemic risk (2012, background): “In particular, the index representing the distance to default or the level of creditworthiness (Hull and White, 2000) is assumed to evolve over time as a stochastic differential equation (SDE) with a lower absorbing barrier, so that the firm defaults when the index value becomes zero (or hits from a”
The Determinants of Credit Default Swap Premia (2009, background): “4Theoretical work includes Das (1995), Hull and White (2000), and Das and Sundaram (1998). we find a negative correlation between spreads and the risk-free rate.”
Reduced Form vs. Structural Models of Credit Risk: A Case Study of Three Models (2005, methodology): “Jarrow, Lando, and Turnbull (1995), Duffie and Singleton (1999), and Hull and White (2000) present detailed explanations of several well known reduced-form modeling approaches.”
Conditional Euro Area Sovereign Default Risk (2014, neutral): “close to zero in our later application). Also, the risk neutral default intensity is assumed to be constant. Finally, we use a CDS pricing formula that does not take into account counterparty credit risk, see also Huang, Zhou, and Zhu (2009), Black, Correa, Huang, and Zhou (2012), and Creal, Gramacy”
The relationship between credit default swap spreads, bond yields, and credit rating announcements (2004, background): “Hull and White (2001) provide an analytic approximation for the impact of counterparty default risk on CDS spreads.”