A revised version of the Cathcart & El-Jahel model and its application to CDS market

Abstract The paper considers the pricing of credit default swaps (CDSs) using a revised version risk model proposed in Cathcart and El-Jahel (2003). Default occurs either first time signaling process breaches threshold barrier or unexpectedly at jump Cox process. intensity depends on risk-free interest rate, which follows Vasicek process, instead Cox-Ingersoll-Ross as original model. This offers two advantages. On one hand, it allows us to account for negative rates are recently observed, other simplifies formula CDSs. goodness fit is tested dataset CDS spreads related European companies. results obtained show rather satisfactory agreement between theoretical predictions market data, identical with In addition, values calibrated parameters result be stable over semi-closed form solution ensures very fast implementation.