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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.

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  • $\begingroup$ "This version", which? ;) $\endgroup$
    – Richi Wa
    Commented May 28, 2014 at 11:50
  • $\begingroup$ Thanks for the document, unfortunately I don't see how this serves as documentation for the ISDA model ... $\endgroup$
    – Richi Wa
    Commented May 28, 2014 at 13:52
  • $\begingroup$ ok, misunderstood the question. $\endgroup$
    – user1157
    Commented May 28, 2014 at 14:41
  • $\begingroup$ Its a basic question that doesn't have anything to do with quant finance. $\endgroup$
    – chollida
    Commented Jun 10, 2014 at 19:59
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    $\begingroup$ @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. $\endgroup$
    – Richi Wa
    Commented Jun 11, 2014 at 6:01

1 Answer 1

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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

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  • $\begingroup$ 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. $\endgroup$
    – Richi Wa
    Commented Jun 11, 2014 at 6:02
  • $\begingroup$ 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. $\endgroup$
    – StudentT
    Commented Jun 11, 2014 at 11:30
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    $\begingroup$ 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! $\endgroup$
    – Greg
    Commented Aug 27, 2014 at 23:23
  • $\begingroup$ Just wondering if you tried reproducing the isda calculation with quantlib? I noticed that they added a isda pricing engine, but after quite a few trys, i still could not match quantlib with bloomberg. $\endgroup$
    – user1559897
    Commented Jan 9, 2018 at 2:54

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