Pricing credit default swaps under Lévy models

Jessica Cariboni and Wim Schoutens

Journal of Computational Finance

Abstract: ABSTRACT Most structural models for credit pricing assume geometric Brownian motion to describe the firm asset value. However, the underlying lognormal distribution does not match empirical distributions, typically skewed and leptokurtic. Moreover, defaults are usually driven by shocks, which are not captured by the continuous paths of Brownian motion. We assume that the asset price process is driven by a pure-jump Lévy process and default is triggered by the crossing of a preset barrier. Our model incorporates asymmetry, fat-tail behavior, jumps and instantaneous defaults. Under this model we price credit default swaps, detailing the calculations for the variance gamma process.

References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.risk.net/journal-of-computational-fina ... ps-under-levy-models (text/html)

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:rsk:journ0:2160404

Access Statistics for this article

More articles in Journal of Computational Finance from Journal of Computational Finance
Bibliographic data for series maintained by Thomas Paine ().