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Title: Forecasting sovereign CDS prices Authors:  Vineet Upreti - Swansea University (United Kingdom) [presenting]
Marco Realdon - Brunel University London (United Kingdom)
Abstract: A key question in forecasting term structures of interest rates and credit spreads is the need and merit of using pricing models that impose the absence of arbitrage across different maturities. This question is addressed in forecasting the CDS prices of nineteen major and diverse sovereigns. Arbitrage-free affine pricing models forecast future term structures of sovereign CDS prices better than arbitrage-prone popular dynamic Nelson-Siegel (DNS) forecasting models. This is the case for both one-week and one-month forecast horizons. Affine pricing models outperform because they are arbitrage-free and often have more flexibility to match the present term structure of CDS prices closely. Simple autoregressions best forecast CDS prices at the one-week forecast horizon, because they perfectly match the present term structure of CDS prices but produce the worst forecasts at the one-month horizon.