On pricing basket credit default swaps

DOI10.1080/14697688.2013.783713zbMATH Open1282.91328arXiv1204.4025OpenAlexW1965496858MaRDI QIDQ5400652FDOQ5400652

Authors: Wai-Ki Ching, Tak Kuen Siu, Harry Zheng, Jia-Wen Gu 

Publication date: 4 March 2014

Published in: Quantitative Finance (Search for Journal in Brave)

Abstract: In this paper we propose a simple and efficient method to compute the ordered default time distributions in both the homogeneous case and the two-group heterogeneous case under the interacting intensity default contagion model. We give the analytical expressions for the ordered default time distributions with recursive formulas for the coefficients, which makes the calculation fast and efficient in finding rates of basket CDSs. In the homogeneous case, we explore the ordered default time in limiting case and further include the exponential decay and the multistate stochastic intensity process. The numerical study indicates that, in the valuation of the swap rates and their sensitivities with respect to underlying parameters, our proposed model outperforms the Monte Carlo method.

Full work available at URL: https://arxiv.org/abs/1204.4025

zbMATH Keywords

numerical resultsrecursive methodsensitivity studyhomogeneous caseCDS ratesdefault time distributioninteracting intensity default contagion modeltwo-group heterogeneous case

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60) Credit risk (91G40)

Cites Work

• The pricing of options and corporate liabilities
• Option pricing and Esscher transform under regime switching
• CORRELATED DEFAULTS IN INTENSITY‐BASED MODELS
• A top-down approach to multiname credit
• The multivariate hazard construction
• Basket CDS pricing with interacting intensities
• Probabilistic model for description of evolution of financial indices
• The \(k\)th default time distribution and basket default swap pricing

Cited In (7)

• A factor contagion model for portfolio credit derivatives
• Credit-equity modeling under a latent Lévy firm process
• On correlated defaults and incomplete information
• Pricing European options under stochastic looping contagion risk model
• Weak convergence of path-dependent SDEs in basket credit default swap pricing with contagion risk
• Interacting default intensity with a hidden Markov process
• Dynamic portfolio optimization with looping contagion risk

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