Proxy CDS Curves for Individual Corporates Globally

Abstract

Corporate credit default swap (CDS) premium is the market price of credit risk posed by a corporate obligor. Although corporate CDS are commonly used for risk benchmarking in accounting and credit risk management, liquid CDS are limited to less than 500 corporate names globally. CDS users must either confine their usage to this limited subset or resort to aggregates derived from the liquid CDS in different industry/rating combinations. This paper offers an intuitive, practical and robust predictive regression model linking liquid USD-denominated CDS premiums of different tenors to a set of obligor-specific attributes, and with the model one can generate proxy CDS curves for corporates without liquid or traded CDS. One key attribute is the actuarial spread that reflects the actuarial value of a CDS contract and is made available by the Credit Research Initiative of National University of Singapore for all exchange-listed firms globally. Other attributes in the predictive regression model include investment vs. speculative grades based on an obligor's credit rating, and some general credit environment variables such as the April 2009 CDS Big Bang, among others. This predictive regression, constructed with the historical record on 405 corporate CDS names, enables daily production of proxy CDS curves on around 35,000 exchange-listed corporates globally.

Keywords: Actuarial spread, distance to default, credit cycle index, investment grade, high yield, big-data, zero-norm penalty, sequential Monte Carlo