Credit Derivatives Pricing With Stochastic Volatility Models
AbstractThis paper proposes a model for pricing credit derivatives in a defaultable HJM framework. The model features hump-shaped, level dependent, and unspanned stochastic volatility, and accommodates a correlation structure between the stochastic volatility, the default-free interest rates, and the credit spreads. The model is finite-dimensional, and leads (a) to exponentially affine default-free and defaultable bond prices, and (b) to an approximation for pricing credit default swaps and swaptions in terms of defaultable bond prices with varying maturities. A numerical study demonstrates that the model captures stylized various features of credit default swaps and swaptions.
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Bibliographic InfoArticle provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.
Volume (Year): 16 (2013)
Issue (Month): 04 ()
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Web page: http://www.worldscinet.com/ijtaf/ijtaf.shtml
Other versions of this item:
- Carl Chiarella & Samuel Chege Maina & Christina Nikitopoulos-Sklibosios, 2011. "Credit Derivative Pricing with Stochastic Volatility Models," Research Paper Series 293, Quantitative Finance Research Centre, University of Technology, Sydney.
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