Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
480405 | European Journal of Operational Research | 2011 | 14 Pages |
Abstract
In this paper a simulation approach for defaultable yield curves is developed within the Heath et al. (1992) framework. The default event is modelled using the Cox process where the stochastic intensity represents the credit spread. The forward credit spread volatility function is affected by the entire credit spread term structure. The paper provides the defaultable bond and credit default swap option price in a probability setting equipped with a subfiltration structure. The Euler–Maruyama stochastic integral approximation and the Monte Carlo method are applied to develop a numerical scheme for pricing. Finally, the antithetic variable technique is used to reduce the variance of credit default swap option prices.
Related Topics
Physical Sciences and Engineering
Computer Science
Computer Science (General)
Authors
Carl Chiarella, Viviana Fanelli, Silvana Musti,