Valoracion de credit default swaps: Una aplicacion del modelo de Hull-White al mercado espanol

Abstract

An empirical application of Hull-White model (2000) to the Spanish market is presented. This model provides an expression to calculate the payment made by credit default swap (CDS) buyer when there is no counterparty default risk. Moreover, it is assumed that the yield par curve, the recovery rate (that is constant) and the moment of credit event are independent. Data from Banco Santander Central Hispano bonds are used to calculate risk neutral default probability and then CDS premia for an underlying bond of the same credit rating are calculated. This premia are computed under no arbitrage arguments and are compared with the market credit spreads. This results show that the model premia are similar to credit spreads and the main conclusion of this paper is that Hull-White model is suitable to obtain the CDS premia in Spanish market.credit risk, credit event, default probability, swaps