cdsbootstrap
Bootstrap default probability curve from credit default swap market quotes
Syntax
Description
[
bootstraps
the default probability curve using credit default swap (CDS) market
quotes. The market quotes can be expressed as a list of maturity dates
and corresponding CDS market spreads, or as a list of maturities and
corresponding upfronts and standard spreads for standard CDS contracts.
The estimation uses the standard model of the survival probability.ProbData
,HazData
]
= cdsbootstrap(ZeroData
,MarketData
,Settle
)
[
adds
optional name-value pair arguments.ProbData
,HazData
]
= cdsbootstrap(___,Name,Value
)
Examples
Input Arguments
Output Arguments
Algorithms
If the time to default is denoted by τ, the default probability curve, or function, PD(t), and its complement, the survival function Q(t), are given by:
In the standard model, the survival probability is defined in terms of a piecewise constant hazard rate h(t). For example, if h(t) =
λ1, for 0
≤t ≤ t1
λ2, for t1 < t ≤ t2
λ3, for t2 <t
then the survival function is given by Q(t) =
, for 0
≤ t ≤ t1
, for t1 < t ≤ t2
, for t2 < t
Given n market dates t1,...,tn and
corresponding market CDS spreads S1,...,Sn, cdsbootstrap
calibrates
the parameters λ1,...,λn and
evaluates PD(t) on the market dates, or an optional
user-defined set of dates.
References
[1] Beumee, J., D. Brigo, D. Schiemert, and G. Stoyle. “Charting a Course Through the CDS Big Bang.” Fitch Solutions, Quantitative Research, Global Special Report. April 7, 2009.
[2] Hull, J., and A. White. “Valuing Credit Default Swaps I: No Counterparty Default Risk.” Journal of Derivatives. Vol. 8, pp. 29–40.
[3] O'Kane, D. and S. Turnbull. “Valuation of Credit Default Swaps.” Lehman Brothers, Fixed Income Quantitative Credit Research, April 2003.
Version History
See Also
cdsspread
| cdsprice
| cdsrpv01
| IRDataCurve
(Financial Instruments Toolbox)