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Valuation of Credit Derivatives with Multiple Time Scales in the Intensity Model

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  • Beom Jin Kim
  • Chan Yeol Park
  • Yong-Ki Ma

Abstract

We propose approximate solutions for pricing zero-coupon defaultable bonds, credit default swap rates, and bond options based on the averaging principle of stochastic differential equations. We consider the intensity-based defaultable bond, where the volatility of the default intensity is driven by multiple time scales. Small corrections are computed using regular and singular perturbations to the intensity of default. The effectiveness of these corrections is tested on the bond price and yield curve by investigating the behavior of the time scales with respect to the relevant parameters.

Suggested Citation

  • Beom Jin Kim & Chan Yeol Park & Yong-Ki Ma, 2014. "Valuation of Credit Derivatives with Multiple Time Scales in the Intensity Model," Journal of Applied Mathematics, Hindawi, vol. 2014, pages 1-12, August.
    • Handle: RePEc:hin:jnljam:968065
    DOI: 10.1155/2014/968065
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