| Title:
|
An approximation formula for the price of credit default swaps under the fast-mean reversion volatility model (English) |
| Author:
|
He, Xin-Jiang |
| Author:
|
Chen, Wenting |
| Language:
|
English |
| Journal:
|
Applications of Mathematics |
| ISSN:
|
0862-7940 (print) |
| ISSN:
|
1572-9109 (online) |
| Volume:
|
64 |
| Issue:
|
3 |
| Year:
|
2019 |
| Pages:
|
367-382 |
| Summary lang:
|
English |
| . |
| Category:
|
math |
| . |
| Summary:
|
We consider the pricing of credit default swaps (CDSs) with the reference asset assumed to follow a geometric Brownian motion with a fast mean-reverting stochastic volatility, which is often observed in the financial market. To establish the pricing mechanics of the CDS, we set up a default model, under which the fair price of the CDS containing the unknown ``no default'' probability is derived first. It is shown that the ``no default'' probability is equivalent to the price of a down-and-out binary option written on the same reference asset. Based on the perturbation approach, we obtain an approximated but closed-form pricing formula for the spread of the CDS. It is also shown that the accuracy of our solution is in the order of $\mathscr O(\epsilon )$. (English) |
| Keyword:
|
credit default swaps |
| Keyword:
|
fast mean-reverting volatility |
| Keyword:
|
perturbation method |
| MSC:
|
91G20 |
| MSC:
|
91G80 |
| idZBL:
|
Zbl 07088746 |
| idMR:
|
MR3956178 |
| DOI:
|
10.21136/AM.2019.0313-17 |
| . |
| Date available:
|
2019-05-24T08:53:28Z |
| Last updated:
|
2021-07-05 |
| Stable URL:
|
http://hdl.handle.net/10338.dmlcz/147723 |
| . |
| Reference:
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