Paper: Proxy CDS Curves for Individual CorporatesGlobally
Corporate credit default swap (CDS) premium is the market price of credit risk posed by a corporate obligor, reflecting its probability of default, the recovery rate on the reference debt instrument upon the obligor default, the additional risk premium demanded by risk averse economic agents, and finally the liquidity condition of the CDS market. Although corporate CDS are widely used for benchmarking in accounting and risk management, liquid CDS are rather limited, and arguably no more than 500 corporate names worldwide. Out of necessity, users either confine themselves to this limited set of CDS or simply resort to CDS aggregates derived from the liquid ones for different industry/rating combinations made available by, say, Markit. This paper offers an intuitive, practical and high-quality alternative through developing a robust predictive regression linking the liquid USD-denominated CDS premiums of different tenors for a corporate obligor to a set of attributes relevant to this obligor. One key attribute deployed is the corporate-specific Actuarial Spread for the corresponding tenor, and our data source is the Credit Research Initiative of National University of Singapore, which generates daily updated Actuarial Spreads, among others, for all exchange-listed firms globally, and make the results freely accessible. Other attributes in the predictive regression include investment vs speculative grades based on the obligor’s credit rating, some credit environment variables, among others. This predictive regression is constructed on the historical record on 405 corporate CDS names, which enables at the present daily production of the proxy CDS curves on around 35,000 exchange-listed corporates globally.