Modelling the evolution of credit spreads using the Cox process within the HJM framework: A CDS option pricing model

Chiarella, C; Fanelli, V; Musti, S

Modelling the evolution of credit spreads using the Cox process within the HJM framework: A CDS option pricing model

Chiarella, C Fanelli, V Musti, S

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Publisher:: Elsevier Inc
Publication Type:: Journal Article
Citation:: European Journal Of Operational Research, 2011, 208 (2), pp. 95 - 108
Issue Date:: 2011-01

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Field	Value	Language
dc.contributor.author	Chiarella, C	en_US
dc.contributor.author	Fanelli, V	en_US
dc.contributor.author	Musti, S	en_US
dc.date.issued	2011-01	en_US
dc.identifier.citation	European Journal Of Operational Research, 2011, 208 (2), pp. 95 - 108	en_US
dc.identifier.issn	0377-2217	en_US
dc.identifier.uri	http://hdl.handle.net/10453/17487
dc.description.abstract	In this paper a simulation approach for defaultable yield curves is developed within the Heath et al. (1992) framework. The default event is modelled using the Cox process where the stochastic intensity represents the credit spread. The forward credit spread volatility function is affected by the entire credit spread term structure. The paper provides the defaultable bond and credit default swap option price in a probability setting equipped with a subfiltration structure. The EulerMaruyama stochastic integral approximation and the Monte Carlo method are applied to develop a numerical scheme for pricing. Finally, the antithetic variable technique is used to reduce the variance of credit default swap option prices.	en_US
dc.publisher	Elsevier Inc	en_US
dc.relation.ispartof	European Journal Of Operational Research	en_US
dc.relation.isbasedon	10.1016/j.ejor.2010.03.006	en_US
dc.subject.classification	Operations Research	en_US
dc.title	Modelling the evolution of credit spreads using the Cox process within the HJM framework: A CDS option pricing model	en_US
dc.type	Journal Article
utslib.citation.volume	2	en_US
utslib.citation.volume	208	en_US
utslib.for	1502 Banking, Finance and Investment	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
utslib.copyright.status	closed_access
pubs.consider-herdc	true	en_US
pubs.issue	2	en_US
pubs.volume	208	en_US

Abstract:

In this paper a simulation approach for defaultable yield curves is developed within the Heath et al. (1992) framework. The default event is modelled using the Cox process where the stochastic intensity represents the credit spread. The forward credit spread volatility function is affected by the entire credit spread term structure. The paper provides the defaultable bond and credit default swap option price in a probability setting equipped with a subfiltration structure. The EulerMaruyama stochastic integral approximation and the Monte Carlo method are applied to develop a numerical scheme for pricing. Finally, the antithetic variable technique is used to reduce the variance of credit default swap option prices.

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http://hdl.handle.net/10453/17487