| Summary: | 碩士 === 國立暨南國際大學 === 財務金融學系 === 100 === The purpose of this study is to explore effects of the stochastic interest rate in the credit default swap (CDS) market pricing and hedging strategies. In recent years, some empirical studies have found that a CDS valuation model only taking default risk into account will lead to pricing errors. Das and Hanouna (2009) show that CDS spreads are directly related to equity market via a hedging strategy. However, in addition to the liquidity risk, they only do the basic assumption of perfect market, not taking into account the effects of other risk. For these reasons, this study takes stochastic interest rate into the CDS pricing and hedging model. By comparing the fixed interest rate model and the stochastic interest rate model, we have found that interest rate improved the CDS pricing results. But unfortunately, consistent in Schaefer and Strebulaev (2008), we show that interest rate does not have significant impact on the cost of hedging credit risk.
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