Basket CDS pricing with interacting intensities

Basket CDS pricing with interacting intensities

In this paper we propose a factor contagion model for correlated defaults. The model covers the heterogeneous conditionally independent portfolio and the factor infectious default portfolio as special cases. The model assumes that the hazard rate processes are driven by external common factors as well as defaults of other names in the portfolio. The total hazard construction method is used to d...

Pricing for Basket CDS and LCDS

In this paper, under the reduced form framework and “Bottom Up” method, a model for pricing a basket Loan-only Credit Default Swap (LCDS), with the negative correlation between prepayment and default, is established. A general pricing formula for it is obtained, where one factor CIR (Cox-Ingersoll-Ross) and ICIR (Inversed CIR) models are used to describe the negative correlation between prepaym...

Multivariate Risk Processes with Interacting Intensities

The classical models in risk theory consider a single type of claims. In the insurance business, however, several business lines with separate claim arrival processes appear naturally, and the individual claim processes may not be independent. We introduce a new class of models for such situations, where the underlying counting process is a multivariate continuous time Markov chain of pure birt...

A Dynamic Programming Approach for Pricing CDS and CDS Options

We propose a general setting for pricing single-name knock-out credit derivatives. Examples include Credit Default Swaps (CDS), European and Bermudan CDS options. The default of the underlying reference entity is modeled within a doubly stochastic framework where the default intensity follows a CIR++ process. We estimate the model parameters through a combination of a cross sectional calibratio...

Basic Insights in Pricing Basket Credit Derivatives