Modelling the Evolution of Credit Spreads using the Cox Process within the HUM Framework: A CDS Option Pricing Model
AbstractIn this paper a simulation approach for defaultable yield curves is developed within the Heath et al. (1992) framework. The default event is modelled using the Cox process where the stochastic intensity represents the credit spread. The forward credit spread volatility function is affected by the entire credit spread term structure. The paper provides the defaultable bond and CDS option price in a probability setting equipped with a subfiltration structure. The Euler-Maruyama stochastic integral approximation and the Monte Carlo method are applied to develop a numerical algorithm for pricing. Finally, the Antithetic Variables technique is used to reduce the variance of CDSO estimations.
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Bibliographic InfoPaper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 232.
Date of creation: 01 Oct 2008
Date of revision:
HJM model; Cox process; Monte Carlo method; bond price; CDS option;
Other versions of this item:
- Chiarella, Carl & Fanelli, Viviana & Musti, Silvana, 2011. "Modelling the evolution of credit spreads using the Cox process within the HJM framework: A CDS option pricing model," European Journal of Operational Research, Elsevier, vol. 208(2), pages 95-108, January.
- Carl Chiarella & Viviana Fanelli & Silvana Musti, 2009. "Modelling the Evolution of Credit Spreads Using the Cox Process Within the HJM Framework A CDS Option Pricing Model," Research Paper Series 255, Quantitative Finance Research Centre, University of Technology, Sydney.
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-11-18 (All new papers)
- NEP-FMK-2008-11-18 (Financial Markets)
- NEP-ORE-2008-11-18 (Operations Research)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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