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CDS Approximation Accuracy Improvement with Cart and Random Forest Algorithms Based on a Time Span Including the COVID-19 Pandemic Period

In: Recent Trends in Financial Engineering Towards More Sustainable Social Impact

Author

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  • Mathieu Mercadier

Abstract

This study uses decision tree and random forest regressions to improve the accuracy of an approximation of credit default swap (CDS) spreads called the Equity-to-Credit (E2C) formula based on a time span including the COVID-19 pandemic period. Certain sections are dedicated to explaining deeper important concepts in machine learning. Random forest regressions run with the E2C and selected additional financial data results in an accuracy in CDS approximations of 82% out-of-sample. The transparency property of these algorithms confirms that, for CDS spreads’ forecasting, the most used feature is the E2C formula and to a lower extent companies’ debt rating and size.

Suggested Citation

  • Mathieu Mercadier, 2022. "CDS Approximation Accuracy Improvement with Cart and Random Forest Algorithms Based on a Time Span Including the COVID-19 Pandemic Period," World Scientific Book Chapters, in: Constantin Zopounidis & Carine Girard-Guerraud & Karima Bouaiss (ed.), Recent Trends in Financial Engineering Towards More Sustainable Social Impact, chapter 3, pages 39-63, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811260483_0003
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    More about this item

    Keywords

    Innovation; Equity-Crowdfunding; Capital Structure; Credit Default Swap; Machine Learning: Green Bonds; Impact Bonds; Shareholder Engagement; ESG; Systemic Risk; Sharing Economy; Impact Accounts;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • F3 - International Economics - - International Finance

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