An analytically tractable time-changed jump-diffusion default intensity model

Naoufel El-Bachir () and Damiano Brigo
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Naoufel El-Bachir: ICMA Centre, University of Reading

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

Abstract: We present a stochastic default intensity model where the intensity follows a tractable jump-diffusion process obtained by applying a deterministic change of time to a non mean-reverting square root jump-diffusion process. The model generates higher implied volatilities for default swaptions than mean-reverting versions, consistent with volatility levels observed on the market.

Keywords: Credit derivatives; Credit Default Swap; Credit Default Swaption; Jump-diffusion; Stochastic intensity; Doubly stochastic poisson process; Cox process; Semi-Analytical formula; Time change (search for similar items in EconPapers)
JEL-codes: C15 C63 C65 G12 G13 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2008-10
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