New model predicts credit default swaps, impacting market spreads and recovery rates.
The article explains how credit default swaps (CDS) are priced using an intensity model. CDS is like insurance against a company not being able to pay its debts. The researchers show two ways to adjust the model based on market data. They also discuss a common problem with setting up the model. Lastly, they compare how much money was recovered from defaulted bonds during a financial crisis.