A Simple Model for Valuing Default Swaps when both Market and Credit Risk are Correlated

by Robert Jarrow of Cornell University, and
Yildiray Yildirim or Syracuse University

December 10, 2001

Abstract: This paper provides a simple analytic formula for valuing default swaps with correlated market and credit risk. We illustrate the numerical implementation of this model by inferring the default probability parameters implicit in default swap quotes for twenty two companies over the time period 8/21/00 to 10/31/00. For comparison, with also provide implicit estimates for the standard model (a special case of our approach) where market and credit risk are statistically independent.

Published in: "Valuing Default Swaps Under Market and Credit Risk Correlation", Journal of Fixed Income, Vol. 11, No. 4, (March 2002), pp. 7-19.

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