Alternative Credit Spreads for Default Term Structures

Summary

The document raises the problem of estimating a default probability term structure when credit default swaps become less available or less reliable because funding and liquidity conditions dominate credit pricing. It asks whether asset swap spreads, credit option adjusted spreads, or asset swap spreads combined with early termination and repo considerations can serve as alternatives.

The text offers no comparison, calibration method, empirical evidence, or conclusion about which input is suitable. Its value is in identifying that spread measures may reflect liquidity, financing, and contractual features as well as default risk. Any reader applying these alternatives would need to account for those effects and validate how they map to default probabilities; the document itself does not provide that procedure.

Key ideas

• CDS quotes may become less useful for default curve estimation when funding and liquidity effects are prominent.
• Asset swap spreads and credit option adjusted spreads are proposed as possible alternative inputs.
• Repo and early termination features may matter when deriving default information from asset swap spreads.
• The document poses these alternatives as questions and supplies no method or validation.

Tags

# Alternatives to CDSs for default term structure?


# Alternatives to CDSs for default term structure?












The CDS market seems to be drying up, funding&liquidity issues are now prevalent over credit, so other sources for default probabilities are needed.

What else is commonly used to obtain a default term structure? ASW spreads/credit OAS? ASW + early termination + repo?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.