Application of the CreditGrades™ Model to Sovereign Credit Default Swaps

The topic of the paper is application of the CreditGrades (TM) model to sovereign credit default swaps. The goal is to estimate a benchmark for the CreditGrades (TM) model, one of structural models, and apply it to forecast the prices of sovereign credit default swaps. The prices of sovereign CDSs of ten selected countries are calculated by the modified CreditGrades (TM) model, and the results are compared with the real prices of sovereign CDSs. The results show that the CreditGrades (TM) model can track credit spreads well and provide timely information about the real sovereign CDS prices, but some appropriated modifications are still required.