Pricing basket default swaps in a tractable shot-noise model
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.
|Date of creation:||27 Apr 2009|
|Date of revision:|
|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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- 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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