Economics, Econometrics and Finance
4 years ago

New method uses credit derivatives to predict market-wide default probabilities daily.

RePEc: Research Papers in Economics
Using Credit Derivatives to Compute Market-Wide Default Probability Term Structures
Hans Byström

Paper Summary

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The article shows how to estimate the likelihood of a market-wide default using credit derivatives. By analyzing CDS index spreads, the researchers can calculate daily default probability term structures for European portfolios. These term structures can help banks, hedge funds, and regulators manage risks and make informed decisions about financial stability.