Thesis Abstract and Dissertation Abstracts
The Application Of The Nelson Siegel Model To Corporate European Cds Curves
Abstract Category: Other Categories
Course / Degree: M.Sc in Computational Finance
Institution / University: University of Limerick, Ireland
Published in: 2011
Bond market growth over the past century has encouraged the construction of numerous models capable of calculating a term structure of interest rates. In 1987, Nelson and Siegel produced a paper that produced one such term structure. Risk exposure to credit markets have witnessed change with the invention of the credit default swap (CDS) in 1994. This allowed for hedging / speculating of / on credit risk of a particular underlying corporate or sovereign. We consider approaches to interest rate term structure calculation to be comparable to that of a CDS term structure with both requiring the payment of a xed, predetermined amount on xed dates. This paper applies the model constructed by Nelson and Siegel to a selection of European Corporate CDS's term structures, analyzes the three elements of the model and their implications for the credit asset class before drawing conclusions and oering further points of research stemming from the results. Testing is performed on 117 entities form the iTraxx Europe index over the period July, 2008 to April, 2009.
While the results are mixed in certain sectors, generally our fi ndings show the inability of the model to completely deal with the volatility noted along the term structure of CDS yields. Over the testing period, CDS curves proved extremely volatile with frequent non parallel shifts in response to macroeconomic events. However, measures could be taken to further tailor the model to the CDS curve shapes. We believe the interpolation of the credit curve (eight points) to replicate the number of data points used in the Nelson and Siegel paper (thirty points) would smooth the curve removing a signi cant portion of the volatility. Also, the introduction of the Svensson (1994) adjustment, which allows for the modeling of a second hump / trough variable, would cater towards the changing shapes of the CDS curves.
Following the application of these changes we suggest further research that will develop these ndings through the prediction of CDS term structures by predicting the model parameters as individual time series. This has been completed with notable success in subsequent papers.
Dissertation Keywords/Search Tags:
CDS
This Dissertation Abstract may be cited as follows:
No user preference. Please use the standard reference methodology.
Submission Details: Dissertation Abstract submitted by Liam Mescall from Ireland on 09-Sep-2011 11:19.
Abstract has been viewed 2546 times (since 7 Mar 2010).
Liam Mescall Contact Details: Email: lmescall1@gmail.com
Disclaimer
Great care has been taken to ensure that this information is correct, however ThesisAbstracts.com cannot accept responsibility for the contents of this Dissertation abstract titled "The Application Of The Nelson Siegel Model To Corporate European Cds Curves". This abstract has been submitted by Liam Mescall on 09-Sep-2011 11:19. You may report a problem using the contact form.
© Copyright 2003 - 2024 of ThesisAbstracts.com and respective owners.