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An analytically tractable time-changed jump-diffusion default intensity model

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  • Naoufel El-Bachir

    ()
    (ICMA Centre, University of Reading)

  • Damiano Brigo

    (Fitch Solutions and Imperial College)

Abstract

We present a stochastic default intensity model where the intensity follows a tractable jump-diffusion process obtained by applying a deterministic change of time to a non mean-reverting square root jump-diffusion process. The model generates higher implied volatilities for default swaptions than mean-reverting versions, consistent with volatility levels observed on the market.

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Bibliographic Info

Paper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2008-06.

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Length: 16 pages
Date of creation: Oct 2008
Date of revision:
Handle: RePEc:rdg:icmadp:icma-dp2008-06

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Related research

Keywords: Credit derivatives; Credit Default Swap; Credit Default Swaption; Jump-diffusion; Stochastic intensity; Doubly stochastic poisson process; Cox process; Semi-Analytical formula; Time change;

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References

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  1. Farshid Jamshidian, 2004. "Valuation of credit default swaps and swaptions," Finance and Stochastics, Springer, vol. 8(3), pages 343-371, 08.
  2. Damiano Brigo & Naoufel El-Bachir, 2008. "An exact formula for default swaptions' pricing in the SSRJD stochastic intensity model," Papers 0812.4199, arXiv.org.
  3. Darrell Duffie & Jun Pan & Kenneth Singleton, 1999. "Transform Analysis and Asset Pricing for Affine Jump-Diffusions," NBER Working Papers 7105, National Bureau of Economic Research, Inc.
  4. Damiano Brigo & Aurélien Alfonsi, 2005. "Credit default swap calibration and derivatives pricing with the SSRD stochastic intensity model," Finance and Stochastics, Springer, vol. 9(1), pages 29-42, January.
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