Default and Recovery Implicit in the Term Structure of Sovereign CDS Spreads
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- Author(s): JUN PAN, KENNETH J. SINGLETON
- Published: Sep 10, 2008
- Pages: 2345-2384
- DOI: 10.1111/j.1540-6261.2008.01399.x
ABSTRACT
This paper explores the nature of default arrival and recovery implicit in the term structures of sovereign CDS spreads. We argue that term structures of spreads reveal not only the arrival rates of credit events 
, but also the loss rates given credit events. Applying our framework to Mexico, Turkey, and Korea, we show that a single‐factor
model with 
following a lognormal process captures most of the variation in the term structures of spreads. The risk premiums associated
with unpredictable variation in 
are found to be economically significant and co‐vary importantly with several economic measures of global event risk, financial
market volatility, and macroeconomic policy.