Weak Convergence of Path-Dependent SDEs in Basket CDS Pricing with Contagion Risk

Yao Tung Huang, Qingshuo Song and Harry Zheng

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Abstract: We investigate the computational aspects of the basket CDS pricing with counterparty risk under a credit contagion model of multinames. This model enables us to capture the systematic volatility increases in the market triggered by a particular bankruptcy. The drawback of this problem is its analytical complication due to its path-dependent functional, which bears a potential failure in its convergence of numerical approximation under standing assumptions. In this paper we find sufficient conditions for the desired convergence of the functionals associated with a class of path-dependent stochastic differential equations. The main ingredient is to identify the weak convergence of the approximated solution to the underlying path-dependent stochastic differential equation.

Date: 2015-05, Revised 2016-05
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