Quotation Dorfleitner, Gregor, Schneider, Paul, Veza, Tanja. 2011. Flexing the default barrier. Quantitative Finance 11 (12): 1729-1743.




The paper introduces a Black-Cox-type structural model for credit default swaps (CDS). The existing literature on structural CDS pricing is extended by allowing a general functional form for the default barrier specified without reference to asset volatilities, dividend yields or interest rates. We develop a fast and robust algorithm to compute survival probabilities numerically. An empirical application suggests that the market-implied barrier is stable over time, with a possibly hump-shaped term structure. The implied barrier can be used for computing survival probabilities consistent with objective expectations of asset evolution, for pricing under counterparty risk, and for determining optimal corporate bond covenants.


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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Journal article
Journal Quantitative Finance
Citation Index SSCI
WU-Journal-Rating new FIN-A, STRAT-B, VW-C, WH-B
Language English
Title Flexing the default barrier
Volume 11
Number 12
Year 2011
Page from 1729
Page to 1743
Reviewed? Y
URL http://dx.doi.org/10.1080/14697688.2010.481633


Dorfleitner, Gregor (Former researcher)
Schneider, Paul (Former researcher)
Veza, Tanja (Former researcher)
Institute for Finance, Banking and Insurance IN (Details)
Research areas (Ă–STAT Classification 'Statistik Austria')
5305 Bank management (Details)
5307 Business and management economics (Details)
5360 Financial mathematics (Details)
5361 Financial management (Details)
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