Abstract
The present master thesis investigates the ability of structural models (Merton, Credit Grades and Leland & Toft) to price a CDS spread and to predict credit spread changes sensitivities with respect to changes in the equity return, known as hedge ratio. The dataset includes 155 non-financial US obligors and covers the period between 2007 and 2012. The calculation was conducted using Python.The finding shows that there exists a modest deviation between market and predicted spreads, independently from the model used. Moreover, our results point to the fact that all models estimate hedge ratios more accurate for non-investment grade CDS. However, none of the models have satisfactorily generated statistically significant HRs for all ratings.
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