ISDA CDS Standard Model as a Spread-to-Upfront Converter
Summary
The discussion describes the ISDA CDS standard model as a reduced-form framework with a constant default hazard rate, equivalent to a homogeneous Poisson default process. Its main purpose, according to the answer, is not to model realistic stochastic credit dynamics but to convert market-quoted CDS spreads into upfront values using the standard risky present-value annuity calculation.
The answer distinguishes quoted spreads from the upfront amount that represents the traded contract’s value. A different credit model may imply different spreads and annuity values, but should produce the same upfront value when consistently calibrated. For time-series analysis, the response recommends converting quoted spreads into upfront values before modeling daily changes, since upfront value and quoted spread do not move linearly. It also reports difficulty finding detailed official documentation and suggests the model has little intended use beyond standard conversion; these claims are an individual answer’s characterization, not a complete technical specification.
Key ideas
- The ISDA standard model is described as using a constant default hazard rate.
- Its principal market use is converting quoted CDS spreads into upfront values.
- The upfront amount is presented as the traded value, while the quoted spread is a market convention.
- Alternative credit models can use different spread and annuity measures while matching the same upfront value.
- For spread time series, converting to upfront values can account for the nonlinear relationship between spreads and value.
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# Documentation of the ISDA CDS standard model
# Documentation of the ISDA CDS standard model
I have to validate the use of the ISDA CDS standard model.
Don't understand me wrong - I am sure that the ISDA model is "good" I just need to know what it is in detail.
I can download an Excel-plugin and C code but I can not find a full documentation of the model. I assume that it is a constant hazard rate model or a present value model using the probabilities of default similar to what one can find e.g. in Hull.
Does anyone have a link to the official and full documentation?
EDIT: I have found this where the authors write about the ISDA CDS standard model. It would nevertheless be useful to have the official documentation by ISDA.
## Answer by StudentT (score 9, accepted)
https://quant.stackexchange.com/a/12615
I could not find any such detailed documentation after some weeks of looking (not non-stop obviously). It is appallingly documented. I do understand fully what it does though so am happy to field some questions on it if you like.
In a nutshell, I can tell you it is a standard reduced-form credit model under a constant hazard rate (i.e. homogeneous Poisson process). As such it assumes that the default-intensity is not stochastic and is therefore totally unsuitable for any type of quant modelling.
In fact, it is not intended for modelling but only serves as a market-standard converter from Quoted Spreads to CDS Upfront. Somewhat analogously to Black-Scholes Implied Vol, nobody thinks that the underlying follows a simple drift diffusion - IV is only a quoting mechanism for option "value".
It is the Upfront $UF = (S_{ISDA}-C)RPV01_{ISDA}$ that is the market-value of the CDS contract and the Quoted Spreads are only a quoting convention which, in conjunction with the ISDA Standard Converter produce that Upfront mark-to-market - (in this way, Quoted Spreads $S_{ISDA}$ are specifically intended for ISDA "Model" $RPV01_{ISDA}$ Conversion).
You could equally come up with your own model (based on say a CIR intensity diffusion) which would have its own spreads $S_{CIR}$ (different to the market quoted spreads) but MUST convert via $RPV01_{CIR}$ to the same Upfront $UF$ which is the value actually exchanged in trading.
$(S_{CIR}-C)RPV01_{CIR} = UF = (S_{ISDA}-C)RPV01_{ISDA}$
You need the ISDA model only in so far as, given a timeseries of Quoted Spreads you need to convert to a timeseries of Upfronts (points-upfront) to subsequently apply your own stochastic model to (the daily differences in points-upfront, which has a convex relationship to the daily differences in quoted spreads). Outside of the spread-to-upfront conversion the ISDA "model" has no (intended or practical) usefulness at all.
Read Damiano Brigo and also the Barclays' "STANDARD CORPORATE CDS HANDBOOK" (2010).
I have a Matlab mex file of the ISDA Source Code Converter which I would happily share with you, but you will need to parse the ISDA Swap Fixings XML Files yourself, to reproduce exactly what you see on Bloomberg CDSW
Best Rgds, MarkShown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.