Credit Default Swaps (CDS) for Non-Financial Firms — Results for Turkish Stocks
This article series will be about credit default swap premium calculation for Turkish BIST30 non-financial firms. First part will be general introduction of the concept, second part about mathematical background and third part about detailed calculations for specific firms.
Code, graphics and data are available at my github page. Please refer to the page for the details.
By using only publicly available data for non-financial BIST30 companies, I have tried to calculate default probabilities of these firms. I have also tried to calculate the trend for all metrics between 2017 start and 2021 November
end. I have used Merton model for default probability of the firm and credit default swap premium. Since asset volatility and asset prices are not available for these firms, I have used equity volatility as basis for the calculation.
First step in the calculation was to calculate equity volatility of each stock for the time horizon between 2017 start and 2021 November end. Equity volatility for each date has been calculated as the volatility realized in the last 250 working days before that date and has been updated on a daily basis. For any given day, I have also calculated equity value of each firm.
By using REPO rates of Turkish Central Bank until 2017 end and overnight rates from BIST exchange after 2018 start, as risk free rates, I have calculated present value of financial debt of each company for the reporting periods starting with 2016 financial end until 2021 September closure.
By cross-solving Merton model equations with market capitalization, financial
debts, equity volatility for each company and risk free rates, I have calculated the default probability and pricing for credit default swap for each financial reporting quarter between 2017 start and 2021 September.
The initial results were that aside from highly indebted firms, default probabilities and credit default pricing were very low as expected from non-existence of any BIST30 non-financial firm default until now. However, even with firms with very solid financial health, I have observed spikes with start of COVID-19 pandemic in March 2020.
Analysis of Results
- Higher indebtedness results in higher CDS premium. With advent of COVID, airlines such as PGSUS and THYAO have seen premiums to increase to close 500 basis points(5%).
2. Higher volatility results in higher CDS premium. DOHOL has seen significant volatility reduction after 2018 compared to other companies and accordingly its probability of default was much lower even after advent of COVID.
3. Higher debt levels compared to asset values result in higher premiums.
