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Credit default swap calibration and derivatives pricing with the SSRD stochastic intensity model

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Author Info

  • Damiano Brigo

    ()

  • Aurélien Alfonsi

    ()

Abstract

We 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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File URL: http://hdl.handle.net/10.1007/s00780-004-0131-x
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Bibliographic Info

Article provided by Springer in its journal Finance and Stochastics.

Volume (Year): 9 (2005)
Issue (Month): 1 (January)
Pages: 29-42
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Handle: RePEc:spr:finsto:v:9:y:2005:i:1:p:29-42

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For corrections or technical questions regarding this item, or to correct its listing, contact: (Guenther Eichhorn) or (Christopher F Baum).

Related research

Keywords: Interest-rate derivatives; credit derivatives; interest-rate intensity correlation; calibration; Monte Carlo simulation;

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Citations

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Cited by:
  1. Damiano Brigo & Kyriakos Chourdakis & Imane Bakkar, 2009. "Counterparty risk valuation for Energy-Commodities swaps: Impact of volatilities and correlation," Quantitative Finance Papers 0901.1099, arXiv.org.
  2. Damiano Brigo & Andrea Pallavicini & Vasileios Papatheodorou, 2009. "Bilateral counterparty risk valuation for interest-rate products: impact of volatilities and correlations," Quantitative Finance Papers 0911.3331, arXiv.org, revised Feb 2010.
  3. Damiano Brigo & Andrea Pallavicini & Roberto Torresetti, 2009. "Credit models and the crisis, or: how I learned to stop worrying and love the CDOs," Quantitative Finance Papers 0912.5427, arXiv.org, revised Feb 2010.
  4. Damiano Brigo, 2011. "Counterparty Risk FAQ: Credit VaR, PFE, CVA, DVA, Closeout, Netting, Collateral, Re-hypothecation, WWR, Basel, Funding, CCDS and Margin Lending," Quantitative Finance Papers 1111.1331, arXiv.org, revised Nov 2011.
  5. Damiano Brigo & Mirela Predescu & Agostino Capponi, 2010. "Credit Default Swaps Liquidity modeling: A survey," Quantitative Finance Papers 1003.0889, arXiv.org, revised Mar 2010.
  6. Damiano Brigo & Naoufel El-Bachir, 2008. "An exact formula for default swaptions' pricing in the SSRJD stochastic intensity model," Quantitative Finance Papers 0812.4199, arXiv.org.
  7. Damiano Brigo & Marco Tarenghi, 2009. "Credit Default Swap Calibration and Equity Swap Valuation under Counterparty Risk with a Tractable Structural Model," Quantitative Finance Papers 0912.3028, arXiv.org.
  8. 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.
  9. Damiano Brigo, 2008. "Constant Maturity Credit Default Swap Pricing with Market Models," Quantitative Finance Papers 0812.4159, arXiv.org.
  10. 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.
  11. 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.

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