Valuation of credit default swaps via Bessel bridges

Hernández del Valle Gerardo and Pacheco-González Carlos
Authors registered in the RePEc Author Service: Gerardo Hernández-del-Valle

No 2014-27, Working Papers from Banco de México

Abstract: A credit default swap (CDS) is a financial contract in which the holder of the instrument will be compensated in the event of a loan default. When available, CDS's are used to monitor the credit risk of countries and companies. In this work we develop a closed form procedure to value a CDS in the case in which the so-called "credit rate index" is modelled as a Bessel bridge of arbitrary order. In particular, these processes seem to capture the nature of a defaultable asset in the sense that they remain strictly positive before default, and thus enrich the existing literature in this field.

Keywords: Credit default swap; Bessel bridge; hitting time; defaultable bond (search for similar items in EconPapers)
JEL-codes: G0 G1 (search for similar items in EconPapers)
Date: 2014-12
New Economics Papers: this item is included in nep-rmg
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