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This paper studies empirical issues of one-factor yield curve models. We focus on the models by Ho and Lee (1986), Hull and White (1990) and Moraleda and Vorst (1996). To be consistent in the comparison of the models, we derive them all within the Ritkchen and Sankarasubramanian (1995) framework, which is a subset of the very general Heath, Jarrow and Morton (1992) model. We estimate model parameters from historical time series of government bond prices. The model by Moraleda and Vorst (1996) turns out to best explain the yield curve dynamics through time. Moreover, humped shapes in the volatility structure as modelled in this model are typically found. Next, we use these parameter estimations for pricing options traded in the Spanish financial market. A comparison between model and market option prices is provided.

In this paper we compare market prices of credit default swaps with model prices. We show that a simple reduced form model with a constant recovery rate outperforms the market practice of directly comparing bonds' credit spreads to default swap premiums. We find that the model works well for investment grade credit default swaps, but only if we use swap or repo rates as proxy for default-free interest rates. This indicates that the government curve is no longer seen as the reference default-free curve. We also show that the model is insensitive to the value of the assumed recovery rate

Abstract: In this paper we compare market prices of credit default swaps with model prices. We show that a simple reduced form model with a constant recovery rate outperforms the market practice of directly comparing bonds' credit spreads to default swap premiums. We find that the model works well for investment grade credit default swaps, but only if we use swap or repo rates as proxy for default-free interest rates. This indicates that the government curve is no longer seen as the reference default-free curve. We also show that the model is insensitive to the value of the assumed recovery rate. Keywords: credit default swaps, credit derivatives, credit risk, default risk, default-free interest rates