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Credit Default Swap Valuation: An application to Spanish firms

by Abel Elizalde of CEMFI & Universidad Pública de Navarra

May 2005

Abstract: This paper presents and tests a model to price Credit Default Swaps (CDS) using the credit risk information extracted from the firms' bond market prices. Six Spanish firms are used in the analysis (BBVA, Caja Madrid, Endesa, Repsol YPF, SCH and Telefonica), which derives daily prices for the firms' CDS covering the period from April 2001 to April 2002. The model is shown to produce CDS prices more volatile than market quotes and to perform better the higher the firm's credit quality. Additionally, it is shown that the choice of the recovery rate does not affect the model implied CDS prices. The model is quick and simple and the paper is intended as an introduction to credit derivatives pricing.

JEL Classification: G12.

Keywords: credit default swap, Spanish firms, valuation.

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