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The Valuation Of The Basket Cds In A Primary-Subsidiary Model

Author

Listed:
  • JIANWEI LIN

    (Department of Mathematics, Tongji University, Shanghai 200092, China;
    Department of Mathematics, Putian University, Putian 351100, China)

  • GECHUN LIANG

    (The Oxford-Man Institute, University of Oxford, Oxford, OX2 6ED, UK)

  • SEN WU

    (Department of Mathematics, Tongji University, Shanghai 200092, China)

  • HARRY ZHENG

    (Department of Mathematics, Imperial College, London SW7 2BZ, UK)

Abstract

This paper considers the valuation problem of basket CDSs. Based on the construction of total hazard rates, the paper develops the work of Zheng and Jiang Zheng and Jiang (2009) from the homogenous case to the primary-subsidiary heterogenous case in the interacting intensity framework, and obtains the corresponding joint density of the default time. Moreover, the paper derives the valuation formulae for the basket CDSs with and without counterparty risk. Numerical results robustly show that, under certain conditions, using the analytical pricing formulae derived in this paper is more efficient than the Monte Carlo method for the basket CDS valuation.

Suggested Citation

  • Jianwei Lin & Gechun Liang & Sen Wu & Harry Zheng, 2011. "The Valuation Of The Basket Cds In A Primary-Subsidiary Model," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 28(02), pages 213-238.
    • Handle: RePEc:wsi:apjorx:v:28:y:2011:i:02:n:s0217595911003144
    DOI: 10.1142/S0217595911003144
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    References listed on IDEAS

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