Journal of Credit Risk

Bootstrapping default probability curves

Lawrence S. J. Luo


Three different methods of bootstrapping default probability curves from par credit default swap spreads are discussed. The first assumes that the default densities are constant between consecutive maturities of given credit default swaps (CDSs); the second assumes that the default intensities are constant between consecutive CDS maturities; and the third assumes that the par CDS spread of any maturity can be interpolated from the given CDS spread curve. Formulas and numerical results are presented to illustrate the similarities and differences of these methods.

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