Credit Default Swaps Pricing Basing On KMV Model And Empirical Study

As bad loans and the risk of bond market increasing,the credit risk in financial institutions has spread in recent years.NAFMII formally launched credit default swap in September 2016 for mitigating credit risk.Credit default swap is the most widely traded credit derivatives in the world which can separate and transfer credit risk effectively.It is crucial to establish a pricing model for credit default swap in Chinese security market.The main credit default swap pricing models are structured model and reduced form model.Structural model takes the corporate assets as European call options,and suggests that the deterioration of its own business and financial situation is the cause of default.Reduced form model assumes that the default intensity is exogenous and follows a Poisson distribution.The strengths and weaknesses of structured model and reduced form model are compared by analyzing the defaults in Chinese bond market.The conclusion is that using structured model to pricing credit default swap is more adaptable.Then the authoroptimizes the parameter estimation method in KMV model according to the Chinese market characteristics and the payment rules of CRMs' premium.In the empirical part,CRMWs are chosen for the lack of the public CDS data in Chinese market.The author compares the trend over a period of time between the theoretical price by optimized pricing model and the CBIC price,and researches the effect of maturity on CRMW price.The main conclusions of the study are as follows:firstly,this optimized pricing model is more adaptable for the CRMW with long residual maturity than CBIC pricing model,but there may be a pricing bias for the CRMW with short residual maturity;Secondly,residual maturity is an important factor for its price when the CRMW comes to maturity.Lastly,KMV model can identify the defaults in Chinese bond market.