Credit derivatives pricing with stochastic volatility models
- Publication Type:
- Journal Article
- Citation:
- International Journal of Theoretical and Applied Finance, 2013, 16 (4)
- Issue Date:
- 2013-06-01
Open Access
Copyright Clearance Process
- Recently Added
- In Progress
- Open Access
This item is open access.
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.
Please use this identifier to cite or link to this item: