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THE VALUATION OF THE BASKET CDS IN A PRIMARY-SUBSIDIARY MODEL

Jianwei Lin (), Gechun Liang (), Sen Wu and Harry Zheng
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Jianwei Lin: Department of Mathematics, Tongji University, Shanghai 200092, China;
Sen Wu: Department of Mathematics, Tongji University, Shanghai 200092, China
Harry Zheng: Department of Mathematics, Imperial College, London SW7 2BZ, UK

Asia-Pacific Journal of Operational Research (APJOR), 2011, vol. 28, issue 02, 213-238

Abstract: This paper considers the valuation problem of basket CDSs. Based on the construction of total hazard rates, the paper develops the work of Zheng and Jiang Zheng and Jiang (2009) from the homogenous case to the primary-subsidiary heterogenous case in the interacting intensity framework, and obtains the corresponding joint density of the default time. Moreover, the paper derives the valuation formulae for the basket CDSs with and without counterparty risk. Numerical results robustly show that, under certain conditions, using the analytical pricing formulae derived in this paper is more efficient than the Monte Carlo method for the basket CDS valuation.

Keywords: Default intensity; contagion; counterparty risk; primary-subsidiary model; basket CDS (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1142/S0217595911003144

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