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Pricing basket default swaps in a tractable shot-noise model

  • Herbertsson, Alexander

    ()

    (Department of Economics, School of Business, Economics and Law, Göteborg University)

  • Jang, Jiwook

    ()

    (Department of Actuarial Studies, Faculty of Business and Economics, Macquarie University)

  • Schmidt, Thorsten

    ()

    (Department of Mathematics, University of Chemnitz)

Registered author(s):

    We value CDS spreads and kth-to-default swap spreads in a tractable shot noise model. The default dependence is modelled by letting the individual jumps of the default intensity be driven by a common latent factor. The arrival of the jumps is driven by a Poisson process. By using conditional independence and properties of the shot noise processes we derive tractable closed-form expressions for the default distribution and the ordered survival distributions in a homogeneous portfolio. These quantities are then used to price and study CDS spreads and kth-to-default swap spreads as function of the model parameters. We study the kth-to-default spreads as function of the CDS spread, as well as other parameters in the model. All calibrations lead to perfect fits.

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    File URL: http://hdl.handle.net/2077/20198
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    Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 359.

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    Length: 17 pages
    Date of creation: 27 Apr 2009
    Date of revision:
    Handle: RePEc:hhs:gunwpe:0359
    Contact details of provider: Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
    Phone: 031-773 10 00
    Web page: http://www.handels.gu.se/econ/

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    1. Rüdiger Frey & Jochen Backhaus, 2008. "Pricing And Hedging Of Portfolio Credit Derivatives With Interacting Default Intensities," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 11(06), pages 611-634.
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