New model predicts bond default values, revolutionizing credit default swaps.
The article discusses a model for pricing credit default swaps that considers bondholders claiming the difference between a bond's post-default market value and face value. The model uses market prices of bonds from the same issuer to determine implied default probabilities. The research extends the model to account for multiple correlated default risks, which are important for swaps subject to counterparty credit risk or with multiple underlyings with correlated risks, like in a basket default swap.