Estimating the Joint Probability of Default Using CreditDefault Swap and Bond Data

Estimating the probability of multiple EU sovereign defaults using CDS and bond data

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The on-going EU sovereign debt crisis is causing great concern about the sustainability of national debt issued by the member states. In this paper, we propose a methodology to estimate the likelihood of the default of one or more countries in the Euro Area by extending the approach in Pianeti et al (2012) to the case of multiple defaults. We provide an assessment of the marginal, the joint and the conditional default probabilities within the Euro Zone.

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Credit Derivatives Market

“…The first is related to the possibility of extracting information from CDS premia and create non parametric mapping from CDS premia to an implied rating system(IRS) [Castellano and Giacometti (2012)]. The second shows how it is possible to extract information on the joint default probability from the CDS premia [Pianeti et al (2012)]. …”

Specification Risk and Calibration Effects of a Multifactor Credit Portfolio Model

“…The motivation for using CDS spreads is that they are the fee to insure debt against the default of the corresponding obligor and therefore can be interpreted as the assessment of market participants about the likelihood of default of the underlying entity. For example, Pianeti et al [2012] uses CDS spreads to estimate the joint probability of default for financial institutions. In addition to this economic motivation, there is a lot of empirical evidence for the connection of CDS spreads and creditworthiness.…”