Essays in Applied Financial Econometrics

TL;DRAbstract

<p>This dissertation studies applied econometric problems in volatility estimation and CDS pricing. The first chapter studies estimation of loss given default from CDS spreads for U.S. corporates. This paper combines a term structure model of credit default swaps (CDS) with weak-identification robust methods to jointly estimate the probability of default and the loss given default of the underlying firm. The model is not globally identified because it forgoes parametric time series restrictions that have ensured identification in previous studies, but that are also difficult to verify in the data. The empirical results show that informative (small) confidence sets for loss given default are estimated for half of the firm-months in the sample, and most of these do not include the conventional value of 0.60. In addition, risk-neutral default probabilities, and hence risk premia on default probabilities, are underestimated when loss given default is exogenously fixed at the conventi

Chat with Paper

AI Agents for this Paper