Basket Credit Derivative Pricing in a Markov Chain Model with Interacting Intensities

Kangquan Zhi, Jie Guo and Xiaosong Qian

Mathematical Problems in Engineering, 2020, vol. 2020, 1-17

Abstract:

In this paper, we propose a Markov chain model to price basket credit default swap (BCDS) and basket credit-linked note (BCLN) with counterparty and contagion risks. Suppose that the default intensity processes of reference entities and the counterparty are driven by a common external shock as well as defaults of other names in the contracts. The stochastic intensity of the external shock is a Cox process with jumps. We derive recursive formulas for the joint distribution of default times and obtain closed-form premium rates for BCDS and BCLN. Numerical experiments are performed to show how the correlated default risks may affect the premium rates.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:hin:jnlmpe:5369879

DOI: 10.1155/2020/5369879

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