System and method for determining model credit default swap spreads

• US 8,805,735 B1
• Filed: 07/09/2007
• Issued: 08/12/2014
• Est. Priority Date: 07/27/2006
• Status: Active Grant

• Current Assignee: Morgan Stanley Capital International Inc. (Morgan Stanley)
• Original Assignee: Morgan Stanley Capital International Inc. (Morgan Stanley)
• Inventors: Goldberg, Lisa R., Poduri, Vijay, Kamat, Rajnish
• Primary Examiner(s): Akintola, Olabode
• Assistant Examiner(s): CAMPBELL, KELLIE L
• Application Number:
  US11/825,718
• Time in Patent Office: 2,591 Days
• Field of Search: 705/37
• US Class Current: 705/38
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

A system and method of determining a model default swap spread for a firm which includes the following steps: (i) determining a calibration group of the firm, wherein the calibration group comprises other firms having a region, a sector and a coarse quality related to the firm; (ii) setting firm leverage variables through combining observable data with a value of at least one model parameter; (iii) calibrating variables based on the calibration group; (iv) calculating the model default swap spread based on at least one of calibration variables; and (v) storing the model default swap spread.

Claims

1. A method of determining a model default swap spread for a firm comprising:

determining, by a computer system, a calibration group of the firm, wherein the calibration group comprises other firms having a region, a sector and a coarse quality related to the firm, wherein the computer system comprises at least one processor;

setting, by the computer system, firm leverage variables μ

_L, σ

_L² and max_L through combining observable data with a value of at least one model parameter, wherein μ

_L is the expected firm leverage, σ

_L² is the variance of the firm leverage, and max_L is the largest possible value for firm leverage L;

calibrating, by the computer system, variables μ

_L, σ

_L², max_L, and firm value variables V and σ

_V based on the calibration group;

calculating, by the computer system, the model default swap spread based on at least one of calibration variables μ

_L, σ

_L², max_L, V and σ

_V; and

storing the model default swap spread in a database of the computer system.

2. The method of claim 1, wherein the region is a geographic region.

3. The method of claim 2, wherein the geographic region is at least one of the United States, North America, the European Union (“

EU”

), the United Kingdom (“

UK”

) and EU/UK.

4. The method of claim 1, wherein the sector comprises an industry classification.

5. The method of claim 1, wherein the at least one model parameter is a model parameter in a parsimonious model.

6. The method of claim 1, wherein calibrating V and σ

_V comprises performing one or more inversion steps to update V and σ

_V for the firm until convergence.

7. The method of claim 6, wherein calibrating μ

_L, σ

_L² and max_L comprises performing one or more minimization steps to update μ

_L, σ

_L², and max_L until convergence.

8. The method of claim 7, further comprising determining, by the computer system, the difference between the market default swap spread for the firm and the model default swap spread for the firm.

9. A non-transitory computer readable medium having instructions stored thereon which, when executed by a processor, cause the processor to determine a model default swap spread for a firm by:

determining a calibration group of the firm, wherein the calibration group comprises other firms having a region, a sector and a coarse quality related to the firm;

setting firm leverage variables μ

_L, σ

_L² and max_L through combining observable data with a value of at least one model parameter, wherein μ

_L is the expected firm leverage, σ

_L² is the variance of the firm leverage, and max_L is the largest possible value for firm leverage L;

calibrating variables μ

_L, σ

_L², max_L, and firm value variables V and σ

_V based on the calibration group; and

calculating the model default swap spread based on at least one of calibration variables μ

_L, σ

_L², max_L, V and σ

_V.

10. The computer readable medium of claim 9, wherein the at least one model parameter is a model parameter in a parsimonious model.

11. The computer readable medium of claim 9, wherein calibrating V and σ

_V comprises performing one or more inversion steps to update V and σ

_V for the firm until convergence.

12. The computer readable medium of claim 11, wherein calibrating μ

_L, σ

_L², and max_L comprises performing one or more minimization steps to update μ

_L, σ

_L², and max_L until convergence.

13. The computer readable medium of claim 12, having further stored thereon instructions, which when executed by the processor, cause the processor to determine the difference between the market default swap spread for the firm and the model default swap spread for the firm.

14. A system for determining a model default swap spread for a firm comprising:

a processor; and

a memory in communication with the processor, wherein the memory stores instructions which when executed by the processor causes the processor to determine a model default swap spread for a firm by;

determining a calibration group of the firm, wherein the calibration group comprises other firms having a region, a sector and a coarse quality related to the firm;

setting firm leverage variables μ

_L, σ

_L² and max_L through combining observable data with a value of at least one model parameter, wherein μ

_L is the expected firm leverage, σ

_L² is the variance of the firm leverage, and max_L is the largest possible value for firm leverage L;

calibrating variables μ

_L, σ

_L², max_L, and firm value variables V and σ

_V based on the calibration group; and

calculating the model default swap spread based on at least one of calibration variables μ

_L, σ

_L², max_L, V and σ

_V.

15. The system of claim 14, wherein the at least one model parameter is a model parameter in a parsimonious model.

16. The system of claim 14, wherein calibrating V and σ

_V comprises performing one or more inversion steps to update V and σ

_V for the firm until convergence.

17. The system of claim 16, wherein calibrating μ

_L, σ

_L², and max_L comprises performing one or more minimization steps to update μ

_L, σ

_L², and max_L until convergence.

18. The system of claim 17, having further stored thereon instructions, which when executed by the processor, cause the processor to determine the difference between the market default swap spread for the firm and the model default swap spread for the firm.

19. A system for determining an implied default swap spread for a firm comprising:

a processor; and

a database in communication with the processor, wherein the database stores data regarding firm value and firm leverage, and wherein the processor is programmed to determine an implied default swap spread for a firm by;

determining a calibration group of the firm, wherein the calibration group comprises other firms having a region, a sector and a coarse quality related to the firm;

setting firm leverage variables μ

_L, σ

_L² and max_L through combining observable data with a value of at least one model parameter, wherein μ

_L is the expected firm leverage, σ

_L² is the variance of the firm leverage, and max_L is the largest possible value for firm leverage L;

calibrating variables μ

_L, σ

_L², max_L, and firm value variables V and σ

_V based on the calibration group; and

calculating the model default swap spread based on at least one of the calibration variables μ

_L, σ

_L², max_L, V and σ

_V.

20. The system of claim 19, wherein the at least one model parameter is a model parameter in a parsimonious model.

21. The system of claim 19, wherein calibrating V and σ

_V comprises performing one or more inversion steps to update V and σ

_V for the firm until convergence.

22. The system of claim 21, wherein calibrating μ

_L, σ

_L² and max_L comprises performing one or more minimization steps to update μ

_L, σ

_L², and max_L until convergence.

23. The system of claim 22, having further stored thereon instructions which, when executed by the processor, cause the processor to determine the difference between the market default swap spread for the firm and the model default swap spread for the firm.