The equity information and recovery rates are provided in Table 3. To determine hazard rates, we need to know the observed market prices of corporate bonds or CDS premia, as the market standard practice is to fit the implied risk-neutral default intensities to these credit sensitive instruments. The corporate bond prices are unfortunately not available for companies X and Y , but their CDS premia are observable as shown in Table 4. Usually the CDS market leads the bond market, in particular during crisis situation. Liquidity in the bond market is typically drying up during a financial crisis. Demand for insurance against default risk, on the other hand, increases if the issuer is experiencing financial stress. Consequently, prices and spreads derived from the CDS market tend to be more reliable. Said differently, CDSs on reference entities are often more actively traded than bonds issued by the reference entities.
Unlike other studies that use bond spreads for pricing (see Tsiveriotis and Fernandes (1998), Ammann, et al. (2003), Zabolotnyuk, et al. (2010), etc.), we perform risky valuation based on credit information extracted from CDS spreads. Given the recovery rates and the CDS premia, we can compute the hazard rates via a standard calibration process (see J.P. Morgan (2001)).