Pricing Equity Default Swaps under an approximation to the CGMY L\'{e}% vy Model
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Publication:6207526
arXiv0711.2807MaRDI QIDQ6207526FDOQ6207526
Authors: Søren Asmussen, Dilip B. Madan, Martijn R. Pistorius 
Publication date: 18 November 2007
Abstract: The Wiener-Hopf factorization is obtained in closed form for a phase type approximation to the CGMY L'{e}vy process. This allows, for the approximation, exact computation of first passage times to barrier levels via Laplace transform inversion. Calibration of the CGMY model to market option prices defines the risk neutral process for which we infer the first passage times of stock prices to 30% of the price level at contract initiation. These distributions are then used in pricing 50% recovery rate equity default swap (EDS) contracts and the resulting prices are compared with the prices of credit default swaps (CDS). An illustrative analysis is presented for these contracts on Ford and GM.
Computational methods for problems pertaining to probability theory (60-08) Processes with independent increments; Lévy processes (60G51)
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