Business Commons^™

An Empirical Review Of Us Corporate Default Swap Valuation: The Implications Of Functional Forms, Kwamie Dunbar

WCBT Faculty Publications

This paper first develops a reduced form three-factor model for valuing credit default premia that is used to provide implicit prices which are then compared with market prices of credit default swaps to determine if swap rates adequately reflects market risks. This model extends Jarrow (2001) two-factor model by adding three new features to enhance the effectiveness of the model and add to the growing debate on the empirical pricing of credit default swap and the effectiveness of reduce form models. Firstly, the extended model retains Jarrow's mean reverting properties but will be extended to be arbitrage free because of …