Modelling the evolution of credit spreads using the Cox process within the HJM framework: A CDS option pricing model

Carl Chiarella, Viviana Fanelli and Silvana Musti

European Journal of Operational Research, 2011, vol. 208, issue 2, 95-108

Abstract: In this paper a simulation approach for defaultable yield curves is developed within the Heath et al. (1992) framework. The default event is modelled using the Cox process where the stochastic intensity represents the credit spread. The forward credit spread volatility function is affected by the entire credit spread term structure. The paper provides the defaultable bond and credit default swap option price in a probability setting equipped with a subfiltration structure. The Euler-Maruyama stochastic integral approximation and the Monte Carlo method are applied to develop a numerical scheme for pricing. Finally, the antithetic variable technique is used to reduce the variance of credit default swap option prices.

Keywords: Pricing; HJM; model; Cox; process; Monte; Carlo; method; CDS; option (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (15)

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Related works:
Working Paper: Modelling the Evolution of Credit Spreads Using the Cox Process Within the HJM Framework A CDS Option Pricing Model (2009)
Working Paper: Modelling the Evolution of Credit Spreads using the Cox Process within the HUM Framework: A CDS Option Pricing Model (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:208:y:2011:i:2:p:95-108

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