Recovering Default Risk from CDS Spreads with a Nonlinear Filter

Publicado en

  • Journal of Economic Dynamics and Control


  • We propose a nonlinear filter to estimate the time-varying default risk from the term structure of credit default swap (CDS) spreads. Based on the numerical solution of the Fokker–Planck equation (FPE) using a meshfree interpolation method, the filter performs a joint estimation of the risk-neutral default intensity and CIR model parameters. As the FPE can account for nonlinear functions and non-Gaussian errors, the proposed framework provides outstanding flexibility and accuracy. We test the nonlinear filter on simulated spreads and apply it to daily CDS data of the Dow Jones Industrial Average component companies from 2005 to 2010 with supportive results.

fecha de publicación

  • 2014

Líneas de investigación

  • CDS Spreads
  • CIR Model
  • Fokker–Planck Equation
  • Meshfree Methods
  • Radial Basis Function Interpolation

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