Herbertsson, Alexander () (Department of Economics, School of Business, Economics and Law, Göteborg University) Jang, Jiwook () (Department of Actuarial Studies, Faculty of Business and Economics, Macquarie University) Schmidt, Thorsten () (Department of Mathematics, University of Chemnitz)
Abstract
We value CDS spreads and kth-to-default swap spreads in a tractable shot noise model. The default dependence is modelled by letting the individual jumps of the default intensity be driven by a common latent factor. The arrival of the jumps is driven by a Poisson process. By using conditional independence and properties of the shot noise processes we derive tractable closed-form expressions for the default distribution and the ordered survival distributions in a homogeneous portfolio. These quantities are then used to price and study CDS spreads and kth-to-default swap spreads as function of the model parameters. We study the kth-to-default spreads as function of the CDS spread, as well as other parameters in the model. All calibrations lead to perfect fits.
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Publisher Info
Paper provided by Göteborg University, Department of Economics in its series Working Papers in Economics with number
359.
Length: 17 pages Date of creation: 27 Apr 2009 Date of revision: Handle: RePEc:hhs:gunwpe:0359
Contact details of provider: Postal: Department of Economics, School of Business, Economics and Law, Göteborg University Box 640, SE 405 30 GÖTEBORG, Sweden Phone: 031-773 10 00 Web page: http://www.handels.gu.se/econ/ More information through EDIRC
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