Pricing CDX Credit Default Swaps Using the Hull-White Model

20 Pages Posted: 21 Jul 2008

See all articles by Bastian Hofberger

Bastian Hofberger

affiliation not provided to SSRN

Niklas Wagner

Passau University

Date Written: September 2007

Abstract

We apply the Hull and White (2000) model with its standard intensity and its approximate no-arbitrage valuation approach to the pricing of credit default swaps (CDSs). Based on a representative sample of individual obligors from the DJ CDX.NA.IG index universe, we evaluate the pricing performance using an overall of 63,460 quotes during the period January 1, 2002 to July 7, 2006. Given that liquid bond data are available, both valuation approaches on average provide satisfying results as measured by spread change correlations and pricing error statistics. Testing for cointegration of spreads generally confirms a stable pricing relationship. However, in about 25 percent of our sample obligors the model is obviously weak. Comparing the results to those of Stewart and Wagner (2008) tentatively suggests that, on average, the Hull-White model is not dominated by CreditGrades or trinomial trees.

Keywords: CDS pricing, Hull-White model

JEL Classification: C52, G13

Suggested Citation

Hofberger, Bastian and Wagner, Niklas F., Pricing CDX Credit Default Swaps Using the Hull-White Model (September 2007). Available at SSRN: https://ssrn.com/abstract=1096366 or http://dx.doi.org/10.2139/ssrn.1096366

Bastian Hofberger

affiliation not provided to SSRN

Niklas F. Wagner (Contact Author)

Passau University ( email )

Innstrasse 27
Passau, 94030
Germany

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