CDS pricing with long memory via fractional Lévy processes

Holger Fink () and Christian Scherr ()
Additional contact information
Holger Fink: Chair of Financial Econometrics, Institute of Statistics, Ludwig-Maximilians-Universit?t München, Akademiestr. 1, D-80799 Munich, Germany
Christian Scherr: Department of Statistics, Faculty of Business, Economics and Management Information Systems, University of Regensburg, D-93040 Regensburg, Germany

Journal of Financial Engineering (JFE), 2014, vol. 01, issue 04, 1-35

Abstract: In this paper, we consider spread rates of credit default swaps (CDSs) in a long memory fractional Lévy setting, i.e. where interest and hazard rates are driven by processes whose autocovariance functions decrease very slowly over time. Empirically, this property can be found in many variables like interest and hazard rates, but the usually applied Markovian models are unable to reflect this. Using earlier results on conditional distributions of fractional Lévy processes, we carry out an extensive analysis of parameter sensitivities useful for researchers and practitioners alike and derive an analytical pricing formula for CDS contracts. A first empirical application is provided as well.

Keywords: Long memory; credit default swap; fractional Lévy process; long range dependence; fractional Brownian motion; CDS pricing (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S2345768614500305
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:jfexxx:v:01:y:2014:i:04:n:s2345768614500305

Ordering information: This journal article can be ordered from

DOI: 10.1142/S2345768614500305

Access Statistics for this article

Journal of Financial Engineering (JFE) is currently edited by George Yuan

More articles in Journal of Financial Engineering (JFE) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().