AN EXACT FORMULA FOR DEFAULT SWAPTIONS’ PRICING IN THE SSRJD STOCHASTIC INTENSITY MODEL

By Damiano Brigo, Naoufel El-Bachir. 2008

73 citations recorded by the source corpus.

We develop and test a fast and accurate semi‐analytical formula for single‐name default swaptions in the context of a shifted square root jump diffusion (SSRJD) default intensity model. The model can be calibrated to the CDS term structure and a few default swaptions, to price and hedge other credit derivatives consistently. We show with numerical experiments that the model implies plausible volatility smiles.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/ba0343c64613e146dff09c8c3da7d7ce897beabf

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Citations in the corpus

ARBITRAGE-FREE VALUATION OF BILATERAL COUNTERPARTY RISK FOR INTEREST-RATE PRODUCTS: IMPACT OF VOLATILITIES AND CORRELATIONS (2011, methodology): “In that work, a stochastic intensity model along the lines of [8] and [18] is assumed, and this model is correlated with the multi-factor short rate process driving the interest-rate dynamics.”
Bilateral Counterparty Risk Valuation with Stochastic Dynamical Models and Application to Credit Default Swaps (2008, methodology): “Brigo and El-Bachir [9] consider in detail the tractable model with jumps, and this extension will be applied in future work.”
Counterparty Risk for Credit Default Swaps: Impact of Spread Volatility and Default Correlation (2009, unknown): “5% 15% 28% 37% 42% 42% -99 Payer adj 0(0) 0(0) 0(0) 0(0) 0(0) 0(0) Receiver adj 40(2) 38(2) 39(2) 38(2) 36(1) 37(1) -90 Payer adj 0(0) 0(0) 0(0) 0(0) 0(0) 0(0) Receiver adj 39(2) 38(2) 38(2) 38(2) 35(1) 37(2) -60 Payer adj 0(0) 0(0) 0(0) 0(0) 0(0) 1(0) Receiver adj 36(1) 35(1) 36(1) 36(1) 32(1) 35(1”
Time-changed CIR default intensities with two-sided mean-reverting jumps (2014, background): “This led a number of authors to introduce jumps into the CIR model [Duffie and Garleanu (2001), Filipović (2001), Brigo and El-Bachir (2006, 2010)].”
ARBITRAGE‐FREE BILATERAL COUNTERPARTY RISK VALUATION UNDER COLLATERALIZATION AND APPLICATION TO CREDIT DEFAULT SWAPS (2014, methodology): “The model option price is obtained through Jamshidian’s decomposition as described in Brigo and Mercurio (2006) and more rigorously in Brigo and El-Bachir (2010), and the values are reported in Brigo et al. (2011).”