Pricing default swaps: empirical evidence

In this paper we compare market prices of credit default swaps with model prices. We show that a simple reduced form model with a constant recovery rate outperforms the market practice of directly comparing bonds' credit spreads to default swap premiums. We find that the model works well for investment grade credit default swaps, but only if we use swap or repo rates as proxy for default-free interest rates. This indicates that the government curve is no longer seen as the reference default-free curve. We also show that the model is insensitive to the value of the assumed recovery ratecredit default swaps;credit risk;default risk;recovery rates;reduced form models

An Empirical Comparison of Default Swap Pricing Models

Abstract: In this paper we compare market prices of credit default swaps with model prices. We show that a simple reduced form model with a constant recovery rate outperforms the market practice of directly comparing bonds' credit spreads to default swap premiums. We find that the model works well for investment grade credit default swaps, but only if we use swap or repo rates as proxy for default-free interest rates. This indicates that the government curve is no longer seen as the reference default-free curve. We also show that the model is insensitive to the value of the assumed recovery rate. Keywords: credit default swaps, credit derivatives, credit risk, default risk, default-free interest ratescredit default swaps;credit risk;default risk;market prices;credit derivatives;default-free interest rates;empirical models

Comparing possible proxies of corporate bond liquidity

We consider eight different proxies (issued amount, coupon, listed, age, missing prices, yield volatility, number of contributors and yield dispersion) to measure corporate bond liquidity and use a five-variable model to control for interest rate risk, credit risk, maturity, rating and currency differences between bonds. The null hypothesis that liquidity risk is not priced in our data set of euro corporate bonds is rejected for seven out of eight liquidity proxies. We find significant liquidity premia, ranging from 9 to 24 basis points. A comparison test between liquidity proxies shows limited differences between the proxies.euro market;corporate bonds;liquidity;Fama-French model

Importance of fossil fuel emission uncertainties over Europe for CO2 modeling: model intercomparison

Inverse modeling techniques used to quantify surface carbon fluxes commonly assume that the uncertainty of fossil fuel CO2 (FFCO2) emissions is negligible and that intra-annual variations can be neglected. To investigate these assumptions, we analyzed the differences between four fossil fuel emission inventories with spatial and temporal differences over Europe and their impact on the model simulated CO2 concentration. Large temporal flux variations characterize the hourly fields (~40 % and ~80 % for the seasonal and diurnal cycles, peak-to-peak) and annual country totals differ by 10 % on average and up to 40 % for some countries (i.e., the Netherlands). These emissions have been prescribed to seven different transport models, resulting in 28 different FFCO2 concentrations fields. The modeled FFCO2 concentration time series at surface sites using time-varying emissions show larger seasonal cycles (+2 ppm at the Hungarian tall tower (HUN)) and smaller diurnal cycles in summer (-1 ppm at HUN) than when using constant emissions. The concentration range spanned by all simulations varies between stations, and is generally larger in winter (up to ~10 ppm peak-to-peak at HUN) than in summer (~5 ppm). The contribution of transport model differences to the simulated concentration std-dev is 2–3 times larger than the contribution of emission differences only, at typical European sites used in global inversions. These contributions to the hourly (monthly) std-dev's amount to ~1.2 (0.8) ppm and ~0.4 (0.3) ppm for transport and emissions, respectively. First comparisons of the modeled concentrations with 14C-based fossil fuel CO2 observations show that the large transport differences still hamper a quantitative evaluation/validation of the emission inventories. Changes in the estimated monthly biosphere flux (Fbio) over Europe, using two inverse modeling approaches, are relatively small (less that 5 %) while changes in annual Fbio (up to ~0.15 % GtC yr-1) are only slightly smaller than the differences in annual emission totals and around 30 % of the mean European ecosystem carbon sink. These results point to an urgent need to improve not only the transport models but also the assumed spatial and temporal distribution of fossil fuel emission inventories

An Empirical Comparison of Default Swap Pricing Models

Abstract: In this paper we compare market prices of credit default swaps with model prices. We show that a simple reduced form model with a constant recovery rate outperforms the market practice of directly comparing bonds' credit spreads to default swap premiums. We find that the model works well for investment grade credit default swaps, but only if we use swap or repo rates as proxy for default-free interest rates. This indicates that the government curve is no longer seen as the reference default-free curve. We also show that the model is insensitive to the value of the assumed recovery rate. Keywords: credit default swaps, credit derivatives, credit risk, default risk, default-free interest rate

Pricing default swaps: empirical evidence

In this paper we compare market prices of credit default swaps with model prices. We show that a simple reduced form model with a constant recovery rate outperforms the market practice of directly comparing bonds' credit spreads to default swap premiums. We find that the model works well for investment grade credit default swaps, but only if we use swap or repo rates as proxy for default-free interest rates. This indicates that the government curve is no longer seen as the reference default-free curve. We also show that the model is insensitive to the value of the assumed recovery rat

Comparing possible proxies of corporate bond liquidity

We consider eight different proxies (issued amount, coupon, listed, age, missing prices, yield volatility, number of contributors and yield dispersion) to measure corporate bond liquidity and use a five-variable model to control for interest rate risk, credit risk, maturity, rating and currency differences between bonds. The null hypothesis that liquidity risk is not priced in our data set of euro corporate bonds is rejected for seven out of eight liquidity proxies. We find significant liquidity premia, ranging from 9 to 24 basis points. A comparison test between liquidity proxies shows limited differences between the proxies

Evidence for ACTN3 as a genetic modifier of Duchenne muscular dystrophy

Duchenne muscular dystrophy (DMD) is characterized by muscle degeneration and progressive weakness. There is considerable inter-patient variability in disease onset and progression, which can confound the results of clinical trials. Here we show that a common null polymorphism (R577X) in ACTN3 results in significantly reduced muscle strength and a longer 10\u2009m walk test time in young, ambulant patients with DMD; both of which are primary outcome measures in clinical trials. We have developed a double knockout mouse model, which also shows reduced muscle strength, but is protected from stretch-induced eccentric damage with age. This suggests that \u3b1-actinin-3 deficiency reduces muscle performance at baseline, but ameliorates the progression of dystrophic pathology. Mechanistically, we show that \u3b1-actinin-3 deficiency triggers an increase in oxidative muscle metabolism through activation of calcineurin, which likely confers the protective effect. Our studies suggest that ACTN3 R577X genotype is a modifier of clinical phenotype in DMD patients

Inverse modeling of CO2 sources and sinks using satellite data: a synthetic inter-comparison of measurement techniques and their performance as a function of space and time

Currently two polar orbiting satellite instruments measure CO₂ concentrations in the Earth's atmosphere, while other missions are planned for the coming years. In the future such instruments might become powerful tools for monitoring changes in the atmospheric CO₂ abundance and to improve our quantitative understanding of the leading processes controlling this. At the moment, however, we are still in an exploratory phase where first experiences are collected and promising new space-based measurement concepts are investigated. This study assesses the potential of some of these concepts to improve CO₂ source and sink estimates obtained from inverse modelling. For this purpose the performance of existing and planned satellite instruments is quantified by synthetic simulations of their ability to reduce the uncertainty of the current source and sink estimates in comparison with the existing ground-based network of sampling sites. Our high resolution inversion of sources and sinks (at 8°x10°) allows us to investigate the variation of instrument performance in space and time and at various temporal and spatial scales. The results of our synthetic tests clearly indicate that the satellite performance increases with increasing sensitivity of the instrument to CO₂ near the Earth's surface, favoring the near infra-red technique. Thermal infrared instruments, on the contrary, reach a better global coverage, because the performance in the near infrared is reduced over the oceans owing to a low surface albedo. Near infra-red sounders can compensate for this by measuring in sun-glint, which will allow accurate measurements over the oceans, at the cost, however, of a lower measurement density. Overall, the sun-glint pointing near infrared instrument is the most promising concept of those tested. We show that the ability of satellite instruments to resolve fluxes at smaller temporal and spatial scales is also related to surface sensitivity. All the satellite instruments performed relatively well over the continents resulting mainly from the larger prior flux uncertainties over land than over the oceans. In addition, the surface networks are rather sparse over land increasing the additional benefit of satellite measurements there. Globally, challenging satellite instrument precisions are needed to compete with the current surface network (about 1ppm for weekly and 8°x10° averaged SCIAMACHY columns). Regionally, however, these requirements relax considerably, increasing to 5ppm for SCIAMACHY over tropical continents. This points not only to an interesting research area using SCIAMACHY data, but also to the fact that satellite requirements should not be quantified by only a single number. The applicability of our synthetic results to real satellite instruments is limited by rather crude representations of instrument and data retrieval related uncertainties. This should receive high priority in future work