IDEAS home Printed from https://ideas.repec.org/a/wsi/ijtafx/v17y2014i03ns0219024914500174.html
   My bibliography  Save this article

A Spread-Return Mean-Reverting Model For Credit Spread Dynamics

Author

Listed:
  • BRENDAN O'DONOGHUE

    (Electrical Engineering Department, Stanford University, USA)

  • MATTHEW PEACOCK

    (White Oak Asset Management SA, Switzerland)

  • JACKY LEE

    (Quantitative Strategies, Investment Banking Division, Credit Suisse Group, United Kingdom)

  • LUCA CAPRIOTTI

    (Quantitative Strategies, Investment Banking Division, Credit Suisse Group, United Kingdom)

Abstract

In this paper, we propose a novel, analytically tractable, one-factor stochastic model for the dynamics of credit default swap (CDS) spreads and their returns, which we refer to as the spread-return mean-reverting (SRMR) model. The SRMR model can be seen as a hybrid of the Black–Karasinski model on spreads and the Ornstein–Uhlenbeck model on spread returns, and is able to capture empirically observed properties of CDS spreads and returns, including spread mean-reversion, heavy tails of the return distribution, and return autocorrelations. Although developed for modeling CDS spreads, the SRMR model has applications for many other stochastic processes with similar empirical properties, including more general rate processes.

Suggested Citation

  • Brendan O'Donoghue & Matthew Peacock & Jacky Lee & Luca Capriotti, 2014. "A Spread-Return Mean-Reverting Model For Credit Spread Dynamics," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 17(03), pages 1-14.
    • Handle: RePEc:wsi:ijtafx:v:17:y:2014:i:03:n:s0219024914500174
    DOI: 10.1142/S0219024914500174
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S0219024914500174
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S0219024914500174?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Consiglio, Andrea & Zenios, Stavros A., 2015. "The Case for Contingent Convertible Debt for Sovereignst," Working Papers 15-13, University of Pennsylvania, Wharton School, Weiss Center.
    2. Andrea Consiglio & Michele Tumminello & Stavros A. Zenios, 2018. "Pricing Sovereign Contingent Convertible Debt," Journal of Enterprising Culture (JEC), World Scientific Publishing Co. Pte. Ltd., vol. 21(08), pages 1-36, December.
    3. Consiglio Andrea & Zenios Stavros A., 2018. "Contingent Convertible Bonds for Sovereign Debt Risk Management," Journal of Globalization and Development, De Gruyter, vol. 9(1), pages 1-24, June.
    4. Mili, Mehdi, 2019. "The impact of tradeoff between risk and return on mean reversion in sovereign CDS markets," Research in International Business and Finance, Elsevier, vol. 48(C), pages 187-200.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:ijtafx:v:17:y:2014:i:03:n:s0219024914500174. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/ijtaf/ijtaf.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.