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CDS pricing with long memory via fractional Lévy processes

Author

Listed:
  • Holger Fink

    (Chair of Financial Econometrics, Institute of Statistics, Ludwig-Maximilians-Universit?t München, Akademiestr. 1, D-80799 Munich, Germany)

  • Christian Scherr

    (Department of Statistics, Faculty of Business, Economics and Management Information Systems, University of Regensburg, D-93040 Regensburg, Germany)

Abstract

In this paper, we consider spread rates of credit default swaps (CDSs) in a long memory fractional Lévy setting, i.e. where interest and hazard rates are driven by processes whose autocovariance functions decrease very slowly over time. Empirically, this property can be found in many variables like interest and hazard rates, but the usually applied Markovian models are unable to reflect this. Using earlier results on conditional distributions of fractional Lévy processes, we carry out an extensive analysis of parameter sensitivities useful for researchers and practitioners alike and derive an analytical pricing formula for CDS contracts. A first empirical application is provided as well.

Suggested Citation

  • Holger Fink & Christian Scherr, 2014. "CDS pricing with long memory via fractional Lévy processes," Journal of Financial Engineering (JFE), World Scientific Publishing Co. Pte. Ltd., vol. 1(04), pages 1-35.
    • Handle: RePEc:wsi:jfexxx:v:01:y:2014:i:04:n:s2345768614500305
    DOI: 10.1142/S2345768614500305
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    References listed on IDEAS

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    1. Tommi Sottinen, 2001. "Fractional Brownian motion, random walks and binary market models," Finance and Stochastics, Springer, vol. 5(3), pages 343-355.
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    Cited by:

    1. Saker Sabkha & Christian Peretti & Dorra Hmaied, 2019. "The Credit Default Swap market contagion during recent crises: international evidence," Review of Quantitative Finance and Accounting, Springer, vol. 53(1), pages 1-46, July.

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