Bestemmelse af CDS spreads ved strukturelle modeller og Hull-White modellen

Erik Linde & Thomas Aasted Sørensen

Student thesis: Master thesis


The aim of this thesis is to investigate the theoretical basis for 3 models, used for pricing credit risk. We will examine, if the models are used easily in practice, and how well they replicate the spreads observed from the CDS market. Our focus will be on the classic Merton model, which was the pioneer within this area, and the extension made to this model derived by Black and Cox. Those 2 models are characterized as structural models and will be compared to a market model derived by Hull and White. For the purpose of testing the models on real data, we have chosen 2 companies from the auto industry. We will use these companies accounting figures as input to the structural models, and bond prices observed from the market as input to the market model. We find from our analysis that the estimation of the input data for the structural models, are difficult and based on great uncertainty. The application of the Hull-White model in practice, are easier because of the low requirements regarding the input data. The theoretical spreads calculated from the models, are not able to replicate the observed spreads from the CDS market. The Hull-White model tends to overestimate the spread while there is no general conclusion for the structural models. Based on the whole analysis, Hull-White achieves the highest correlation with the observed spreads, but there are cases where the structural models have higher correlation performance than Hull-White. In general we must conclude that it is not possible to replicate the observed spreads from any of these models. Regarding the practical application, we will recommend the Hull-White model because of the low requirements to the input data.

EducationsMSc in Business Administration and Management Science, (Graduate Programme) Final Thesis
Publication date2009
Number of pages110