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CDS pricing using a Copula-Monte Carlo Approach

Author

Listed:
  • Reyna Susana García Ruiz

    (Facultad de Contaduría y Administración, Universidad Nacional Autónoma de México)

  • Francisco López-Herrera

    (Facultad de Contaduría y Administración, Universidad Nacional Autónoma de México)

  • Salvador Cruz-Ake

    (Escuela Superior de Economía, Instituto Politécnico Nacional)

Abstract

This paper proposes a methodology, based on Copula, Monte Carlo, and Bootstrap methodologies, to price a CDS without using more data than the one provided by the financial statements. This means that our methodology could be suitable not only for firms listed in the exchange market but also for nonlisted firms, so the results shown on the paper could extend the possibility of pricing CDS. The propounded methodology links the default probabilities to some key variables which dependence structure is captured by a copula and recombine it for pricing the CDS. To test the validity of the proposed methodology, we used data from TV Azteca (a media Mexican Company with recent financial concerns) and we obtained a CDS spread similar to the default rate implied in its credit risk rating.

Suggested Citation

  • Reyna Susana García Ruiz & Francisco López-Herrera & Salvador Cruz-Ake, 2017. "CDS pricing using a Copula-Monte Carlo Approach," Revista de Investigación en Ciencias Contables y Administrativas, Universidad Michoacana de San Nicolás de Hidalgo, Facultad de Contaduría y Ciencias Administrativas, vol. 3(1), pages 111-133, July.
    • Handle: RePEc:snh:journl:v:3:y:2017:i:1:p:111-133
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    References listed on IDEAS

    as
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    2. Genest, Christian & Rémillard, Bruno & Beaudoin, David, 2009. "Goodness-of-fit tests for copulas: A review and a power study," Insurance: Mathematics and Economics, Elsevier, vol. 44(2), pages 199-213, April.
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