arXiv · arXiv · 2024
This paper presents the experimental process and results of SVM, Gradient Boosting, and an Attention-GRU Hybrid model in predicting the Implied Volatility of rolled-over five-year spread contracts of credit default swaps (CDS) on European corporate debt during the quarter following mid-May '24, as represented by the iTraxx/Cboe Europe Main 1-Month Volatility Index (BP Volatility). The analysis employs a feature matri…
Robert Taylor
arXiv · arXiv · 2018
Credit Value Adjustment (CVA) is the difference between the value of the default-free and credit-risky derivative portfolio, which can be regarded as the cost of the credit hedge. Default probabilities are therefore needed, as input parameters to the valuation. When liquid CDS are available, then implied probabilities of default can be derived and used. However, in small markets, like the Nordic region of Europe, the…
Ola Hammarlid, Marta Leniec
arXiv · arXiv · 2011
We present a dialogue on Counterparty Credit Risk touching on Credit Value at Risk (Credit VaR), Potential Future Exposure (PFE), Expected Exposure (EE), Expected Positive Exposure (EPE), Credit Valuation Adjustment (CVA), Debit Valuation Adjustment (DVA), DVA Hedging, Closeout conventions, Netting clauses, Collateral modeling, Gap Risk, Re-hypothecation, Wrong Way Risk, Basel III, inclusion of Funding costs, First t…
Damiano Brigo
arXiv · arXiv · 2009
In the third part of this series we introduce consistent relative value measures for CDS-Bond basis trades using the bond-implied CDS term structure derived from fitted survival rate curves. We explain why this measure is better than the traditionally used Z-spread or Libor OAS and offer simplified hedging and trading strategies which take advantage of the relative value across the entire range of maturities of cash …
Arthur M. Berd, Roy Mashal, Peili Wang
arXiv · arXiv · 2025
Modern economic systems face unprecedented socioeconomic challenges, making systemic resilience and effective liquidity flow management essential. Traditional models such as CAPM, VaR, and GARCH often fail to reflect real market fluctuations and extreme events. This study develops and validates an innovative mathematical model based on the Navier-Stokes equations, aimed at the quantitative assessment, forecasting, an…
Davit Gondauri
arXiv · arXiv · 2025
We consider an equity market subject to risk from both unhedgeable shocks and default. The novelty of our work is that to partially offset default risk, investors may dynamically trade in a credit default swap (CDS) market. Assuming investment opportunities are driven by functions of an underlying diffusive factor process, we identify the certainty equivalent for a constant absolute risk aversion investor with a semi…
Zhe Fei, Scott Robertson
arXiv · arXiv · 2022
We compare the five major sources of corporate Credit Default Swap prices: GFI, Fenics, Reuters, CMA, and Markit, using the most liquid single name 5-year CDS in the iTraxx and CDX indexes from 2004 to 2010. Deviations from the common trend among prices in the different databases are not random but are explained by idiosyncratic factors, financing costs, global risk, and other trading factors. The CMA quotes lead the…
Sergio Mayordomo, Juan Ignacio Peña, Eduardo S. Schwartz
arXiv · arXiv · 2022
The notion of a credit spread curve is fundamental in fixed income investing, but in practice it is not `given' and needs to be constructed from bond prices either for a particular issuer, or for a sector rating-by-rating. Rather than attempting to fit spreads -- and as we discuss here, the Z-spread is unsuitable -- we fit parametrised survival curves. By deriving a valuation formula for a risky bond, we explain and …
Richard J. Martin
arXiv · arXiv · 2021
Risk-neutral default probabilities can be implied from credit default swap (CDS) market quotes. In practice, mid CDS quotes are used as inputs, as their risk-neutral counterparts are not observable. We show how to imply risk-neutral default probabilities from bid and ask quotes directly by means of formulating the CDS calibration problem to bid and ask market quotes within the conic finance framework. Assuming the ri…
Matteo Michielon, Asma Khedher, Peter Spreij
arXiv · arXiv · 2020
We study two questions related to competition on the OTC CDS market using data collected as part of the EMIR regulation. First, we study the competition between central counterparties through collateral requirements. We present models that successfully estimate the initial margin requirements. However, our estimations are not precise enough to use them as input to a predictive model for CCP choice by counterparties i…
Louis Abraham
arXiv · arXiv · 2020
One of the most challenging aspects in the analysis and modelling of financial markets, including Credit Default Swap (CDS) markets, is the presence of an emergent, intermediate level of structure standing in between the microscopic dynamics of individual financial entities and the macroscopic dynamics of the market as a whole. This elusive, mesoscopic level of organisation is often sought for via factor models that …
Ioannis Anagnostou, Tiziano Squartini, Drona Kandhai, Diego Garlaschelli
arXiv · arXiv · 2016
In this paper, we search whether the Benford's law is applicable to monitor daily changes in sovereign Credit Default Swaps (CDS) quotes, which are acknowledged to be complex systems of economic content. This test is of paramount importance since the CDS of a country proxy its health and probability to default, being associated to an insurance against the event of its default. We fit the Benford's law to the daily ch…
Marcel Ausloos, Rosella Castellano, Roy Cerqueti
arXiv · arXiv · 2016
We study insolvency cascades in an interbank system when banks are allowed to insure their loans with credit default swaps (CDS) sold by other banks. We show that, by properly shifting financial exposures from one institution to another, a CDS market can be designed to rewire the network of interbank exposures in a way that makes it more resilient to insolvency cascades. A regulator can use information about the topo…
Matt V. Leduc, Sebastian Poledna, Stefan Thurner
arXiv · arXiv · 2014
Recently, incomplete-market techniques have been used to develop a model applicable to credit default swaps (CDSs) with results obtained that are quite different from those obtained using the market-standard model. This article makes use of the new incomplete-market model to further study CDS hedging and extends the model so that it is capable treating single-name CDS portfolios. Also, a hedge called the vanilla hedg…
Michael B. Walker
arXiv · arXiv · 2010
Bilateral CVA as currently implement has the counterintuitive effect of profiting from one's own widening CDS spreads, i.e. increased risk of default, in practice. The unified picture of CVA and liquidity introduced by Morini & Prampolini 2010 has contributed to understanding this. However, there are two significant omissions for practical implementation that come from the same source, i.e. positions not booked in us…
Chris Kenyon
arXiv · arXiv · 2010
We review different approaches for measuring the impact of liquidity on CDS prices. We start with reduced form models incorporating liquidity as an additional discount rate. We review Chen, Fabozzi and Sverdlove (2008) and Buhler and Trapp (2006, 2008), adopting different assumptions on how liquidity rates enter the CDS premium rate formula, about the dynamics of liquidity rate processes and about the credit-liquidit…
Damiano Brigo, Mirela Predescu, Agostino Capponi
arXiv · arXiv · 2009
We give a comprehensive review of credit term structure modeling methodologies. The conventional approach to modeling credit term structure is summarized and shown to be equivalent to a particular type of the reduced form credit risk model, the fractional recovery of market value approach. We argue that the corporate practice and market observations do not support this approach. The more appropriate assumption is the…
Arthur M. Berd
arXiv · arXiv · 2009
In this three-part series of papers, we argue that the conventional spread measures are not well defined for credit-risky bonds and introduce a set of credit term structures which correct for the biases associated with the strippable cash flow valuation assumption. We demonstrate that the resulting estimates are significantly more robust and remain meaningful even when applied to deeply distressed bonds. We also sugg…
Arthur M. Berd, Roy Mashal, Peili Wang