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A Valuation Method for Credit Default Swaps Using an Extended Version of the Merton Model

Drageseth, Eilif
Master thesis
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URI
http://hdl.handle.net/11250/267422
Date
2012
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  • Institutt for samfunnsøkonomi [769]
Abstract
This thesis proposes a credit risk model for credit default swap (CDS) valuation. The standard Merton (1974) model is extended to implement a stationary leverage ratio, a stochastic asset drift rate, and a stochastic, mean reverting volatility rate. The CDS valuation is performed by applying the discounted cash flow method to the credit risk model. The model is investigated in Matlab, using Monte Carlo simulations to analyze the sensitivity of the modeled CDS term structures to changes in the value of the input parameters. The results show that the proposed model generates higher CDS spreads than the standard Merton model.
Publisher
Norges teknisk-naturvitenskapelige universitet, Fakultet for samfunnsvitenskap og teknologiledelse, Institutt for samfunnsøkonomi

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