A dynamic programming approach for pricing CDS and CDS options
Abstract
We propose a flexible framework for pricing single-name knock-out credit derivatives. Examples include Credit Default Swaps (CDSs) and European, American and Bermudan CDS options. The default of the underlying reference entity is modelled within a doubly stochastic framework where the default intensity follows a CIR++ process. We estimate the model parameters through a combination of a cross sectional calibration-based method and a historical estimation approach. We propose a numerical procedure based on dynamic programming and a piecewise linear approximation to price American-style knock-out credit options. Our numerical investigation shows consistency, convergence and efficiency. We find that American-style CDS options can complete the credit derivatives market by allowing the investor to focus on spread movements rather than on the default event.Download Info
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic Info
Article provided by Taylor and Francis Journals in its journal Quantitative Finance.
Volume (Year): 9 (2009)
Issue (Month): 6 ()
Pages: 717-726
Download reference. The following formats are available: HTML
(with abstract),
plain text
(with abstract),
BibTeX,
RIS (EndNote, RefMan, ProCite),
ReDIF
Handle: RePEc:taf:quantf:v:9:y:2009:i:6:p:717-726
Contact details of provider:
Web page: http://taylorandfrancis.metapress.com/link.asp?target=journal&id=111405
Order Information:
Web: http://www.tandf.co.uk/journals/subscription.asp
For corrections or technical questions regarding this item, or to correct its listing, contact: (Michael McNulty).
Related research
Keywords: Credit derivatives; Credit default swaps; Bermudan options; Dynamic programming; Doubly stochastic Poisson process; Cox process;References
No references listed on IDEASYou can help add them by filling out this form.
Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Richard J Martin, 2011. "A CDS Option Miscellany," Quantitative Finance Papers 1201.0111, arXiv.org.
Lists
This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.Statistics
Access and download statisticsCorrections
When requesting a correction, please mention this item's handle: RePEc:taf:quantf:v:9:y:2009:i:6:p:717-726For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.