Valuation of a Basket Loan Credit Default Swap

Jin Liang and Yujing Zhou

International Journal of Financial Research, 2010, vol. 1, issue 1, 21-29

Abstract: This paper provides a methodology for valuing a basket Loan CDS (LCDS) by considering both default and prepayment risks. Under ¡°top down¡± and intensity framework, using a single-factor model, correlated default and prepayment risks are considered, where the stochastic interest rate is used to be their common factor. All stochastic processes in the model are assumed to follow CIR processes. Through Feynman-Kac formula, we obtain a PDE problem and its closed-form solution. Numerical examples are provided.

Keywords: LCDS; Default; Prepayment; PDE method; Closed-form solution (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:jfr:ijfr11:v:1:y:2010:i:1:p:21-29

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