Take the 2-minute tour ×
Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. It's 100% free, no registration required.

I have to validate the use of the ISDA CDS standard model.

Don't understand me wrong - I am sure that the ISDA model is "good" I just need to know what it is in detail.

I can download an Excel-plugin and C code but I can not find a full documentation of the model. I assume that it is a constant hazard rate model or a present value model using the probabilities of default similar to what one can find e.g. in Hull.

Does anyone have a link to the official and full documentation?

EDIT: I have found this where the authors write about the ISDA CDS standard model. It would nevertheless be useful to have the official documentation by ISDA.

share|improve this question
    
"This version", which? ;) –  Richard May 28 at 11:50
    
Thanks for the document, unfortunately I don't see how this serves as documentation for the ISDA model ... –  Richard May 28 at 13:52
    
ok, misunderstood the question. –  user1157 May 28 at 14:41
    
Its a basic question that doesn't have anything to do with quant finance. –  chollida Jun 10 at 19:59
1  
@chollida I totally disagree with you. How can you apply a software or a model if you don't know how it works? StudentT's answer below proves that this is a quant question. –  Richard Jun 11 at 6:01

1 Answer 1

up vote 3 down vote accepted

I could not find any such detailed documentation after some weeks of looking (not non-stop obviously). It is appallingly documented. I do understand fully what it does though so am happy to field some questions on it if you like.

In a nutshell, I can tell you it is a standard reduced-form credit model under a constant hazard rate (i.e. homogeneous Poisson process). As such it assumes that the default-intensity is not stochastic and is therefore totally unsuitable for any type of quant modelling.

In fact, it is not intended for modelling but only serves as a market-standard converter from Quoted Spreads to CDS Upfront. Somewhat analogously to Black-Scholes Implied Vol, nobody thinks that the underlying follows a simple drift diffusion - IV is only a quoting mechanism for option "value".

It is the Upfront $UF = (S_{ISDA}-C)RPV01_{ISDA}$ that is the market-value of the CDS contract and the Quoted Spreads are only a quoting convention which, in conjunction with the ISDA Standard Converter produce that Upfront mark-to-market - (in this way, Quoted Spreads $S_{ISDA}$ are specifically intended for ISDA "Model" $RPV01_{ISDA}$ Conversion).

You could equally come up with your own model (based on say a CIR intensity diffusion) which would have its own spreads $S_{CIR}$ (different to the market quoted spreads) but MUST convert via $RPV01_{CIR}$ to the same Upfront $UF$ which is the value actually exchanged in trading.

$(S_{CIR}-C)RPV01_{CIR} = UF = (S_{ISDA}-C)RPV01_{ISDA}$

You need the ISDA model only in so far as, given a timeseries of Quoted Spreads you need to convert to a timeseries of Upfronts (points-upfront) to subsequently apply your own stochastic model to (the daily differences in points-upfront, which has a convex relationship to the daily differences in quoted spreads). Outside of the spread-to-upfront conversion the ISDA "model" has no (intended or practical) usefulness at all.

Read Damiano Brigo and also the Barclays' "STANDARD CORPORATE CDS HANDBOOK" (2010).

I have a Matlab mex file of the ISDA Source Code Converter which I would happily share with you, but you will need to parse the ISDA Swap Fixings XML Files yourself, to reproduce exactly what you see on Bloomberg CDSW

Best Rgds, Mark

share|improve this answer
    
Hi Mark (@StudenT) thanks for your answer. This is the explanation I was looking for. I epxected it to be something as the BS for CDS - just as you write. –  Richard Jun 11 at 6:02
    
HI Richard, no problem - I wish someone had explained it to me before I read all the docs on it. :-) There are still a lot of buy side PMs, analysts & 3rd party analytics that are misusing the ISDA quoted spreads by using their own non ISDA spread-to-upfront converter with them. –  StudentT Jun 11 at 11:30
2  
would you be willing to share the mex file you have for the ISDA pricer in MATLAB? I'm really interested in using it! Thanks! –  Greg 2 days ago

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.