• Equity Derivatives

    On functional relationships between stock price and CDS spread

    We aim to verify statistically if the often proposed hyperbolic relationship between stock price and default intensity is evident in real-world data. CDS spreads are used as proxy for the unobservable default intensity. Although the relationship can be seen clearly in plots, standard regression models are unable to give reliable parameter estimates. We conclude that the hyperbolic relation is a fair enough proxy for the real functional relation in the context of credit-equity modeling, but if the aim is to give an estimate for the CDS spread based on observations of the stock price, other statistical methods should be used.

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