Credit derivatives pricing with stochastic volatility models

Chiarella, C; Maina, SC; Sklibosios, CN

Credit derivatives pricing with stochastic volatility models

Chiarella, C Maina, SC Sklibosios, CN

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Publication Type:: Journal Article
Citation:: International Journal of Theoretical and Applied Finance, 2013, 16 (4)
Issue Date:: 2013-06-01

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Field	Value	Language
dc.contributor.author	Chiarella, C	en_US
dc.contributor.author	Maina, SC	en_US
dc.contributor.author	Sklibosios, CN https://orcid.org/0000-0002-5879-3731	en_US
dc.date.issued	2013-06-01	en_US
dc.identifier.citation	International Journal of Theoretical and Applied Finance, 2013, 16 (4)	en_US
dc.identifier.issn	0219-0249	en_US
dc.identifier.uri	http://hdl.handle.net/10453/33449
dc.identifier.uri	http://hdl.handle.net/10453/26982
dc.description.abstract	This paper proposes a model for pricing credit derivatives in a defaultable HJM framework. The model features hump-shaped, level dependent, and unspanned stochastic volatility, and accommodates a correlation structure between the stochastic volatility, the default-free interest rates, and the credit spreads. The model is finite-dimensional, and leads (a) to exponentially affine default-free and defaultable bond prices, and (b) to an approximation for pricing credit default swaps and swaptions in terms of defaultable bond prices with varying maturities. A numerical study demonstrates that the model captures stylized various features of credit default swaps and swaptions. © 2013 World Scientific Publishing Company.	en_US
dc.relation.ispartof	International Journal of Theoretical and Applied Finance	en_US
dc.relation.isbasedon	10.1142/S0219024913500192	en_US
dc.subject.classification	Finance	en_US
dc.title	Credit derivatives pricing with stochastic volatility models	en_US
dc.type	Journal Article
utslib.citation.volume	4	en_US
utslib.citation.volume	16	en_US
utslib.for	1502 Banking, Finance and Investment	en_US
utslib.for	01 Mathematical Sciences	en_US
utslib.for	15 Commerce, Management, Tourism and Services	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
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Finance Discipline
pubs.organisational-group	/University of Technology Sydney/Strength - QFRC - Quantitative Finance Research Centre
utslib.copyright.status	open_access
pubs.issue	4	en_US
pubs.publication-status	Published	en_US
pubs.volume	16	en_US

Abstract:

This paper proposes a model for pricing credit derivatives in a defaultable HJM framework. The model features hump-shaped, level dependent, and unspanned stochastic volatility, and accommodates a correlation structure between the stochastic volatility, the default-free interest rates, and the credit spreads. The model is finite-dimensional, and leads (a) to exponentially affine default-free and defaultable bond prices, and (b) to an approximation for pricing credit default swaps and swaptions in terms of defaultable bond prices with varying maturities. A numerical study demonstrates that the model captures stylized various features of credit default swaps and swaptions. © 2013 World Scientific Publishing Company.

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http://hdl.handle.net/10453/26982