Skip to main content
placeholder image

Pricing credit default swaps under a multi-scale stochastic volatility model

Journal Article


Download full-text (Open Access)

Abstract


  • In this paper, we consider the pricing of credit default swaps (CDSs) with the reference asset driven by a geometric Brownian motion with a multi-scale stochastic volatility (SV), which is a two-factor volatility process with one factor controlling the fast time scale and the other representing the slow time scale. A key feature of the current methodology is to establish an equivalence relationship between the CDS and the down-and-out binary option through the discussion of "no default" probability, while balancing the two SV processes with the perturbation method. An approximate but closed-form pricing formula for the CDS contract is finally obtained, whose accuracy is in the order of θ (ϵ+δ+ϵδ)

Authors


Publication Date


  • 2017

Citation


  • Chen, W. & He, X. (2017). Pricing credit default swaps under a multi-scale stochastic volatility model. Physica A: Statistical Mechanics and its Applications, 468 425-433.

Scopus Eid


  • 2-s2.0-85003848909

Ro Full-text Url


  • http://ro.uow.edu.au/cgi/viewcontent.cgi?article=7394&context=eispapers

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers/6364

Number Of Pages


  • 8

Start Page


  • 425

End Page


  • 433

Volume


  • 468

Place Of Publication


  • Netherlands

Abstract


  • In this paper, we consider the pricing of credit default swaps (CDSs) with the reference asset driven by a geometric Brownian motion with a multi-scale stochastic volatility (SV), which is a two-factor volatility process with one factor controlling the fast time scale and the other representing the slow time scale. A key feature of the current methodology is to establish an equivalence relationship between the CDS and the down-and-out binary option through the discussion of "no default" probability, while balancing the two SV processes with the perturbation method. An approximate but closed-form pricing formula for the CDS contract is finally obtained, whose accuracy is in the order of θ (ϵ+δ+ϵδ)

Authors


Publication Date


  • 2017

Citation


  • Chen, W. & He, X. (2017). Pricing credit default swaps under a multi-scale stochastic volatility model. Physica A: Statistical Mechanics and its Applications, 468 425-433.

Scopus Eid


  • 2-s2.0-85003848909

Ro Full-text Url


  • http://ro.uow.edu.au/cgi/viewcontent.cgi?article=7394&context=eispapers

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers/6364

Number Of Pages


  • 8

Start Page


  • 425

End Page


  • 433

Volume


  • 468

Place Of Publication


  • Netherlands