Multiscale Intensity Models for Single Name Credit Derivatives
نویسندگان
چکیده
We study the pricing of defaultable derivatives, such as bonds, bond options, and credit default swaps in the reduced form framework of intensity-based models. We use regular and singular perturbation expansions on the intensity of default from which we derive approximations for the pricing functions of these derivatives. In particular, we assume an Ornstein-Uhlenbeck process for the interest rate, and a two-factor diffusion model for the intensity of default. The approximation allows for computational efficiency in calibrating the model. Finally, empirical evidence on the existence of multiple scales is presented by the calibration of the model on corporate yield curves.
منابع مشابه
Multiscale Intensity Models and Name Grouping for Valuation of Multi-name Credit Derivatives
The pricing of collateralized debt obligations and other basket credit derivatives is contingent upon (i) a realistic modeling of the firms’ default times and the correlation between them, and (ii) efficient computational methods for computing the portfolio loss distribution from the individual firms’ default time distributions. Factor models, a widelyused class of pricing models, are computati...
متن کاملUtility Valuation of Credit Derivatives: Single and Two-Name Cases
We study the effect of risk aversion on the valuation of credit derivatives. Using the technology of utility-indifference valuation in intensity-based models of default risk, we analyze resulting yield spreads for single-name defaultable bonds, and a simple representative two-name credit derivative. The impact of risk averse valuation on prices and yield spreads is expressed in terms of effecti...
متن کاملCredit Default Swaps Calibration and Option Pricing with the SSRD Stochastic Intensity and Interest-Rate Model
In the present paper we introduce a two-dimensional shifted square-root diffusion (SSRD) model for interest rate derivatives and single-name credit derivatives, in a stochastic intensity framework. The SSRD is the unique model, to the best of our knowledge, allowing for an automatic calibration of the term structure of interest rates and of credit default swaps (CDS’s). Moreover, the model reta...
متن کاملMulti-scale Time-changed Birth Processes for Pricing Multi-name Credit Derivatives
We develop two parsimonious models for pricing multi-name credit derivatives. We derive closed form expression for the loss distribution, which then can be used in determining the prices of tranche and index swaps and more exotic derivatives on these contracts. Our starting point is the model of [2], which takes the loss process as a time changed birth process. We introduce stochastic parameter...
متن کاملAnalysis of Systematic Risks in Multi-Name Credit and Equity Markets
In this paper, we present an intensity-based common factor model that is used to analyze the valuation of common systematic risks in multi-name credit and equity markets. In particular, we use a hybrid intensity model to price single-name credit instruments such as credit default swaps (CDSs), multi-name credit derivatives such as collateralized debt obligations (CDOs), and equity index options...
متن کامل