Credit default swap calibration and derivatives pricing with the SSRD stochastic intensity model
AbstractWe introduce the two-dimensional shifted square-root diffusion (SSRD) model for interest-rate and credit derivatives with (positive) stochastic intensity. The SSRD is the unique explicit diffusion model allowing an automatic and separated calibration of the term structure of interest rates and of credit default swaps (CDS’s), and retaining free dynamics parameters that can be used to calibrate option data. We propose a new positivity preserving implicit Euler scheme for Monte Carlo simulation. We discuss the impact of interest-rate and default-intensity correlation and develop an analytical approximation to price some basic credit derivatives terms involving correlated CIR processes. We hint at a formula for CDS options under CIR + + CDS-calibrated stochastic intensity. Copyright Springer-Verlag Berlin/Heidelberg 2005
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Bibliographic InfoArticle provided by Springer in its journal Finance and Stochastics.
Volume (Year): 9 (2005)
Issue (Month): 1 (January)
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Web page: http://www.springerlink.com/content/101164/
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- Damiano Brigo & Naoufel El-Bachir, 2008.
"An exact formula for default swaptions' pricing in the SSRJD stochastic intensity model,"
- Damiano Brigo & Naoufel El-Bachir, 2007. "An exact formula for default swaptions’ pricing in the SSRJD stochastic intensity model," ICMA Centre Discussion Papers in Finance icma-dp2007-14, Henley Business School, Reading University.
- Damiano Brigo & Naoufel El-Bachir, 2006. "Credit Derivatives Pricing with a Smile-Extended Jump Stochastic Intensity Model," ICMA Centre Discussion Papers in Finance icma-dp2006-13, Henley Business School, Reading University.
- Damiano Brigo, 2011. "Counterparty Risk FAQ: Credit VaR, PFE, CVA, DVA, Closeout, Netting, Collateral, Re-hypothecation, WWR, Basel, Funding, CCDS and Margin Lending," Papers 1111.1331, arXiv.org, revised Jun 2012.
- Guarin, Alexander & Liu, Xiaoquan & Ng, Wing Lon, 2011. "Enhancing credit default swap valuation with meshfree methods," European Journal of Operational Research, Elsevier, vol. 214(3), pages 805-813, November.
- Damiano Brigo & Marco Tarenghi, 2009. "Credit Default Swap Calibration and Equity Swap Valuation under Counterparty Risk with a Tractable Structural Model," Papers 0912.3028, arXiv.org.
- Naoufel El-Bachir & Damiano Brigo, 2008. "An analytically tractable time-changed jump-diffusion default intensity model," ICMA Centre Discussion Papers in Finance icma-dp2008-06, Henley Business School, Reading University.
- Cousot, Laurent, 2007. "Conditions on option prices for absence of arbitrage and exact calibration," Journal of Banking & Finance, Elsevier, vol. 31(11), pages 3377-3397, November.
- Damiano Brigo, 2008. "Constant Maturity Credit Default Swap Pricing with Market Models," Papers 0812.4159, arXiv.org.
- S. Corsaro & P. De Angelis & Z. Marino & F. Perla, 2011. "Participating life insurance policies: an accurate and efficient parallel software for COTS clusters," Computational Management Science, Springer, vol. 8(3), pages 219-236, August.
- Damiano Brigo & Mirela Predescu & Agostino Capponi, 2010. "Credit Default Swaps Liquidity modeling: A survey," Papers 1003.0889, arXiv.org, revised Mar 2010.
- Guo, Zhi Jun, 2008. "A note on the CIR process and the existence of equivalent martingale measures," Statistics & Probability Letters, Elsevier, vol. 78(5), pages 481-487, April.
- Damiano Brigo & Andrea Pallavicini & Vasileios Papatheodorou, 2009. "Bilateral counterparty risk valuation for interest-rate products: impact of volatilities and correlations," Papers 0911.3331, arXiv.org, revised Feb 2010.
- Damiano Brigo & Jo\~ao Garcia & Nicola Pede, 2013. "CoCo Bonds Valuation with Equity- and Credit-Calibrated First Passage Structural Models," Papers 1302.6629, arXiv.org.
- Jankowitsch, Rainer & Pullirsch, Rainer & Veza, Tanja, 2008. "The delivery option in credit default swaps," Journal of Banking & Finance, Elsevier, vol. 32(7), pages 1269-1285, July.
- Damiano Brigo & Andrea Pallavicini & Roberto Torresetti, 2009. "Credit models and the crisis, or: how I learned to stop worrying and love the CDOs," Papers 0912.5427, arXiv.org, revised Feb 2010.
- Jean-David Fermanian & Olivier Vigneron, 2012. "On break-even correlation: the way to price structured credit derivatives by replication," Papers 1204.2251, arXiv.org.
- Damiano Brigo & Kyriakos Chourdakis & Imane Bakkar, 2009. "Counterparty risk valuation for Energy-Commodities swaps: Impact of volatilities and correlation," Papers 0901.1099, arXiv.org.
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