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Investigating the Performance of Non-Gaussian Stochastic Intensity Models in the Calibration of Credit Default Swap Spreads

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  • Michele Bianchi
  • Frank Fabozzi

Abstract

Most important financial models assume randomness is explained through a normal random variable because, in general, use of alternative models is obstructed by the difficulty of calibrating and simulating them. Here we empirically study credit default swap pricing models under a reduced-form framework assuming different dynamics for the default intensity process. We explore pricing performance and parameter stability during the highly volatile period from June 30, 2008 to December 31, 2010 for different classes of processes driven by Brownian motion, three non-Gaussian Lévy processes, and a Sato process. The models are analyzed from both a static and dynamic perspective. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Michele Bianchi & Frank Fabozzi, 2015. "Investigating the Performance of Non-Gaussian Stochastic Intensity Models in the Calibration of Credit Default Swap Spreads," Computational Economics, Springer;Society for Computational Economics, vol. 46(2), pages 243-273, August.
    • Handle: RePEc:kap:compec:v:46:y:2015:i:2:p:243-273
    DOI: 10.1007/s10614-014-9457-4
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    Cited by:

    1. Piergiacomo Sabino & Nicola Cufaro Petroni, 2022. "Fast simulation of tempered stable Ornstein–Uhlenbeck processes," Computational Statistics, Springer, vol. 37(5), pages 2517-2551, November.
    2. Nicola Cufaro Petroni & Piergiacomo Sabino, 2020. "Tempered stable distributions and finite variation Ornstein-Uhlenbeck processes," Papers 2011.09147, arXiv.org.
    3. Gong, Xiaoli & Zhuang, Xintian, 2017. "American option valuation under time changed tempered stable Lévy processes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 466(C), pages 57-68.
    4. Michele Leonardo Bianchi & Svetlozar T. Rachev & Frank J. Fabozzi, 2018. "Calibrating the Italian Smile with Time-Varying Volatility and Heavy-Tailed Models," Computational Economics, Springer;Society for Computational Economics, vol. 51(3), pages 339-378, March.
    5. Gong, Xiao-li & Zhuang, Xin-tian, 2016. "Option pricing and hedging for optimized Lévy driven stochastic volatility models," Chaos, Solitons & Fractals, Elsevier, vol. 91(C), pages 118-127.
    6. Nicola Cufaro Petroni & Piergiacomo Sabino, 2020. "Gamma Related Ornstein-Uhlenbeck Processes and their Simulation," Papers 2003.08810, arXiv.org.
    7. Ayub Ahmadi & Mahdieh Tahmasebi, 2024. "Pricing and delta computation in jump-diffusion models with stochastic intensity by Malliavin calculus," Papers 2405.00473, arXiv.org, revised Feb 2025.

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