THE STOCHASTIC INTENSITY SSRD MODEL IMPLIED VOLATILITY PATTERNS FOR CREDIT DEFAULT SWAP OPTIONS AND THE IMPACT OF CORRELATION

Damiano Brigo and Laurent Cousot ()
Additional contact information
Laurent Cousot: Courant Institute, New York University, 251 Mercer Street, New York, NY 10012, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2006, vol. 09, issue 03, 315-339

Abstract: In this paper we investigate implied volatility patterns in the Shifted Square Root Diffusion (SSRD) model as functions of the model parameters. We begin by recalling the Credit Default Swap (CDS) options market model that is consistent with a market Black-like formula, thus introducing a notion of implied volatility for CDS options. We examine implied volatilities coming from SSRD prices and characterize the qualitative behavior of implied volatilities as functions of the SSRD model parameters. We introduce an analytical approximation for the SSRD implied volatility that follows the same patterns in the model parameters and that can be used to have a first rough estimate of the implied volatility following a calibration. We compute numerically the CDS-rate volatility smile for the adopted SSRD model. We find a decreasing pattern of SSRD implied volatilities in the interest-rate/intensity correlation. We check whether it is possible to assume zero correlation after the option maturity in computing the option price.

Keywords: Stochastic intensity model; credit default swap; calibration; option pricing; credit spread volatility; Monte Carlo simulation (search for similar items in EconPapers)
Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024906003597
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:ijtafx:v:09:y:2006:i:03:n:s0219024906003597

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024906003597

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().