Computing the survival probability in the Madan–Unal credit risk model: application to the CDS market

Luca Vincenzo Ballestra, Graziella Pacelli, Davide Radi

Risultato della ricerca: Contributo in rivistaArticolo in rivista

Abstract

We obtain a quasi-analytical approximation of the survival probability in the credit risk model proposed in [Madan, D.B. and Unal, H., Pricing the risk of default. Rev. Deriv. Res., 1998, 2(2), 121–160]. Such a formula, which extensive numerical simulations reveal to be accurate and computationally fast, can also be employed for pricing credit default swaps (CDSs). Specifically, we derive a quasi-analytical approximate expression for CDS par spreads, and we use it to estimate the parameters of the model. The results obtained show a rather satisfactory agreement between theoretical and real market data.
Lingua originaleEnglish
pagine (da-a)299-313
Numero di pagine15
RivistaQuantitative Finance
Volume17
DOI
Stato di pubblicazionePubblicato - 2017

Keywords

  • CDS
  • Credit default swap
  • Survival probability
  • Madan–Unal model
  • Default risk

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