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A Valuation Method for Credit Default Swaps Using an Extended Version of the Merton Model
Norwegian University of Science and Technology, Faculty of Social Sciences and Technology Management, Department of Economics.
2012 (English)Masteroppgave, 20 credits / 30 HE creditsStudent thesis
Abstract [en]

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.

Place, publisher, year, edition, pages
2012. , 66 p.
National Category
URN: urn:nbn:no:ntnu:diva-17401OAI: diva2:552593
Social and Behavioural Science, Law
Available from: 2012-11-06 Created: 2012-09-14 Last updated: 2012-11-06Bibliographically approved

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