Finance and Financial Management Commons^™

Credit Default Swaps - Essays On Model And Market Efficiency, Muhammad F. Farooqi

Electronic Thesis and Dissertation Repository

Essay 1 tests the ability of a commercial structural credit default swap pricing model to predict market spreads. Consistent with several previous studies testing other models, we find our model unable to price credit risk precisely and observe an illiquidity premium reflecting a credit risk component which should be incorporated into future pricing models. We also identify macroeconomic and stock market factors that help explain movements in CDS spreads beyond the levels suggested by the model.

Essay 2 looks at bid and ask spreads to find evidence of quote shading where dealers manipulate their quotes in order to attract sell …