Default swap games driven by spectrally negative Lévy processes

DOI10.1016/J.SPA.2012.09.008zbMATH Open1255.91418arXiv1105.0238OpenAlexW1753444463MaRDI QIDQ1933591FDOQ1933591

Authors: Masahiko Egami, Tim Leung, Kazutoshi Yamazaki 

Publication date: 24 January 2013

Published in: Stochastic Processes and their Applications (Search for Journal in Brave)

Abstract: This paper studies game-type credit default swaps that allow the protection buyer and seller to raise or reduce their respective positions once prior to default. This leads to the study of an optimal stopping game subject to early default termination. Under a structural credit risk model based on spectrally negative Levy processes, we apply the principles of smooth and continuous fit to identify the equilibrium exercise strategies for the buyer and the seller. We then rigorously prove the existence of the Nash equilibrium and compute the contract value at equilibrium. Numerical examples are provided to illustrate the impacts of default risk and other contractual features on the players' exercise timing at equilibrium.

Full work available at URL: https://arxiv.org/abs/1105.0238

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zbMATH Keywords

scale functionNash equilibriumcredit default swapsoptimal stopping gamesLévy processes

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Derivative securities (option pricing, hedging, etc.) (91G20) Credit risk (91G40) Stopping times; optimal stopping problems; gambling theory (60G40) Stochastic games, stochastic differential games (91A15)

Cited In (14)

• On the continuous and smooth fit principle for optimal stopping problems in spectrally negative Lévy models
• Optimal stopping problems for maxima and minima in models with asymmetric information
• Optimality of Two-Parameter Strategies in Stochastic Control
• Dynamic Leveraging–Deleveraging Games
• American step-up and step-down default swaps under Lévy models
• Games of singular control and stopping driven by spectrally one-sided Lévy processes
• Game theoretic valuation of deposit insurance under jump risk: from too small to survive to too big to fail
• On the optimality of threshold type strategies in single and recursive optimal stopping under Lévy models
• Optimal valuation of American callable credit default swaps under drawdown of Lévy insurance risk process
• Optimality of doubly reflected Lévy processes in singular control
• Optimal capital structure with scale effects under spectrally negative Lévy models
• Inventory Control for Spectrally Positive Lévy Demand Processes
• Contraction options and optimal multiple-stopping in spectrally negative Lévy models
• An analytic recursive method for optimal multiple stopping: Canadization and phase-type fitting

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