CREDIT DERIVATIVES PRICING WITH STOCHASTIC VOLATILITY MODELS

Carl Chiarella, Samuel Chege Maina () and Christina Nikitopoulos-Sklibosios ()
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Samuel Chege Maina: E.ON Energy Trading SE, Holzstrasse 6, 40221 Dusseldorf, Germany

International Journal of Theoretical and Applied Finance (IJTAF), 2013, vol. 16, issue 04, 1-28

Abstract: This paper proposes a model for pricing credit derivatives in a defaultable HJM framework. The model features hump-shaped, level dependent, and unspanned stochastic volatility, and accommodates a correlation structure between the stochastic volatility, the default-free interest rates, and the credit spreads. The model is finite-dimensional, and leads (a) to exponentially affine default-free and defaultable bond prices, and (b) to an approximation for pricing credit default swaps and swaptions in terms of defaultable bond prices with varying maturities. A numerical study demonstrates that the model captures stylized various features of credit default swaps and swaptions.

Keywords: Stochastic volatility; Heath–Jarrow–Morton framework; defaultable bond prices; credit spreads; CDS rates (search for similar items in EconPapers)
Date: 2013
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http://www.worldscientific.com/doi/abs/10.1142/S0219024913500192
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Related works:
Working Paper: Credit Derivative Pricing with Stochastic Volatility Models (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:16:y:2013:i:04:n:s0219024913500192

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DOI: 10.1142/S0219024913500192

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