Credit Default Swap Pricing Model And Empirical Study

For the consideration of commercial bank's credit risk management and many companies' issuing corporate bonds in China, to develop and improve the credit default swap market will become a necessary step to build credit derivatives market in China. As the largest and fastest growing product in credit derivatives market, credit default swap can not only help the banks avoid the risk of default by maturity, access to relatively safe and stable cash flow, but also provide safe and effective protection to the corporations which want to issue corporate bonds or the short-term margin bond and so on.In the United States sub-prime crisis, credit default swap has became the booster which accelerates the U.S. financial crisis. From the bankrupt issue of American International Group (AIG), We can see that although the credit default swap enlarge the risk of crisis in the United States, but this crisis was mainly due to the imperfect regulatory of the Board of Governors of the Federal Reserve System (FED). We can't deny the effectiveness of credit default swap to avoid the credit risk for the banks and some enterprises. We should learn the experiences and lessons from the sub-prime crisis and research credit default swap to use it effectively in the future.At present, the international credit default swap market is not perfect, and if our country want to promote the credit default swap in the future, we must establish a unified credit default swap pricing formula. This article focuses on analyzing the main factor which affect the credit default swap pricing, and prices the credit default swap spreads reasonably. The contract period, market liquidity and risk-free interest rate have the main effect to the price of credit default swap. In this paper an econometric approach is used to establish quantitative relationship between them. Based on traditional credit default swap pricing formula, Hull-White model and the KMV model, this paper propose a more forward-looking credit default swap pricing models, and make an empirical study by the data of the Deere company. Finally, the article points out the necessity of developing the credit default swap in domestic, and improves the credit default swap pricing model to suit for China's actual situation.