An empirical comparison of alternative credit default swap pricing models
AbstractMost of the important models in finance rest on the assumption that randomness is explained through a normal random variable because, in general, the use of alternative models is obstructed by the difficulty of calibrating and simulating them. In this paper, we empirically study models for pricing credit default swaps under a reduced-form framework, assuming different dynamics for the default intensity process. After reviewing the most recent results on this subject, we explore both pricing performance and parameter stability during the highly volatile period from 30 June 2008 to 31 December 2010 for different classes of processes: one driven by the Brownian motion, three driven by non-Gaussian LÃ©vy processes, and the last one driven by a Sato process. The models are analysed from both a static and dynamic perspective.
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Bibliographic InfoPaper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 882.
Date of creation: Sep 2012
Date of revision:
credit default swap; Cox-Ingersoll-Ross; non-Gaussian Ornstein-Uhlenbeck processes; LÃ©vy processes; Sato processes; filtering methods; unscented Kalman filter; particle filter;
Find related papers by JEL classification:
- C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
- C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
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