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by Francisco Santos
This thesis empirically analyses credit default swaps. The model that we use is the Jarrow-Turnbull credit risk model with a constant recovery rate but assuming hazard rates that are function of time to maturity. The hazard rate is modelled as constant, linear and quadratic functions of time to maturity. For twenty five dates considered we estimate the hazard rate parameters based on fixed-coupon, bullet, senior unsecured bonds, denominated in euros. With the hazard functions we compute the predicted credit default swap premium. The results indicate that, globally, the linear specification produces results that are not biased, while the constant and quadratic specifications overestimate results. Analyzing by maturity of the instrument, we observe that the quadratic specification is better for short maturities; the linear specification is the best in medium maturities, while for long maturities a constant hazard function seems to be the best. We also show that pricing errors in these models are a function of the credit rating of the bond issuer; of the time to maturity and of the date of issuance of the credit default swap.