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Semi-Analytical Pricing for General Default Intensity Models

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  • Ryan Parker
  • Mark Stedman
  • Luca Capriotti

Abstract

Using the path-integral formalism, we develop an accurate and easy-to-compute semi-analytical approximation for a general class of {default intensity} models. We illustrate the accuracy of the method by presenting results for the Black-Karasinski model for which the proposed approximation provides remarkably accurate results, even in regimes of high volatility and multi-year time horizons. The accuracy and the computational efficiency of the proposed approximation makes it a viable alternative to fully numerical schemes for a variety of applications in econometrics and derivatives pricing, including the computation of XVA for credit products. As a practical example, we consider the pricing of a quanto Credit Default Swap (CDS) under stochastic intensity of default and an FX devaluation model.

Suggested Citation

  • Ryan Parker & Mark Stedman & Luca Capriotti, 2026. "Semi-Analytical Pricing for General Default Intensity Models," Papers 2606.21800, arXiv.org.
    • Handle: RePEc:arx:papers:2606.21800
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    File URL: https://arxiv.org/pdf/2606.21800
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