Prediction of default: A comparison of the ability of credit ratings and credit default swaps to predict default in financial companies

Sammanfattning: This thesis compares the ability of credit default swaps and credit ratings to estimate probability of default in the financial sector by examining 40 European and US based financial companies during the period June 30, 2006 to June 30, 2009. No statistically significant difference is found between the two methods in the default probabilities given to the companies in the sample. Further, no statistically significant difference is found for either method in the probabilities of default given to the group of companies defaulting during the period of study compared to the group of companies not in default. The intergroup risk assessment of credit ratings and credit default swaps is, however, found to be statistically different.