Credit derivatives pricing with stochastic volatility models

Publisher:
World Scientific
Publication Type:
Journal Article
Citation:
International Journal of Theoretical and Applied Finance, 2013, 16 (4), pp. 1 - 28
Issue Date:
2013-01
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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 Read More: http://www.worldscientific.com.ezproxy.lib.uts.edu.au/doi/abs/10.1142/S0219024913500192
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