Valuation of basket credit default swaps under stochastic default intensity models

Umeorah, Nneka ORCID: https://orcid.org/0000-0002-0307-5011, Ehrhardt, Matthias and Mashele, Phillip 2020. Valuation of basket credit default swaps under stochastic default intensity models. Advances in Applied Mathematics and Mechanics 12 (5) , pp. 1301-1326. 10.4208/aamm.oa-2019-0141

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Abstract

Portfolio credit derivatives, including the basket credit default swaps, are designed to facilitate the transfer of credit risk amongst market participants. Investors consider them as cheap tools to hedge a portfolio of credits, instead of individual hedging of the credits. The prime aim of this work is to model the hazard rate process using stochastic default intensity models, as well as extend the results to the pricing of basket default swaps. We focused on the nth-to-default swaps whereby the spreads are dependent on the nth default time, and we estimated the joint survival probability distribution functions of the intensity models under the risk-neutral pricing measure, for both the homogeneous and the heterogeneous portfolio. This work further employed the Monte-Carlo method, under the one-factor Gaussian copula model to numerically approximate the distribution function of the default time, and thus, the numerical experiments for pricing the nth default swaps were made viable under the two portfolio types. Finally, we compared the effects of different swap parameters to various nth-to-default swaps.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Mathematics
Publisher:	GLOBAL SCIENCE PRESS
ISSN:	2070-0733
Date of Acceptance:	24 May 2020
Last Modified:	10 Nov 2022 10:45
URI:	https://orca.cardiff.ac.uk/id/eprint/148025

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