Credit default swap calibration and derivatives pricing with the SSRD stochastic intensity model
type: Item
instance of: scholarly article
title: Credit default swap calibration and derivatives pricing with the SSRD stochastic intensity model
zbMATH Open document ID: 1065.60085
author: Damiano Brigo
author: Aurélien Alfonsi
published in: Finance and Stochastics
publication date: 2005-05-20T00:00:00Z
review text: The two-dimensional shifted square-root diffusion (SSRD) model for interest-rate and credit derivatives in presence of stochastic intensity is introduced. The important feature of this model is the possible correlation between the interest rate and the default intensity (related to the credit spread). It is possibly the unique explicit model providing positive intensities and interest rates that can be exactly and analytically calibrated to the term structure of interest rates and credit default swaps (CDS's). Some parameters remain to be used to calibrate cap options data in the interest-rate market and possible options on CDS's on the credit derivatives market. Calibration to two markets can be kept separately, which is of practical value and ensures consistency between different desks of a financial institution. A new positivity preserving implicit Euler scheme for Monte Carlo simulation is proposed. The impact of interest-rate and default-intensity correlation is discussed and an analytical approximation to price some basic credit derivatives terms involving CIR processes is developed.
reviewed by: Yuliya S. Mishura
Mathematics Subject Classification ID: 60H30
Mathematics Subject Classification ID: 60J10
Mathematics Subject Classification ID: 91B70
Mathematics Subject Classification ID: 60J75
Mathematics Subject Classification ID: 91G20
Mathematics Subject Classification ID: 91G40
zbMATH DE Number: 2169552
zbMATH Keywords: interest-rate derivatives
zbMATH Keywords: credit derivatives
zbMATH Keywords: interest-rate intensity correlation
zbMATH Keywords: calibration
zbMATH Keywords: Monte Carlo simulation
MaRDI profile type: Publication
full work available at URL: s00780-004-0131-x
OpenAlex ID: W2095196343
DOI: 10.1007/S00780-004-0131-X
description: scientific article; zbMATH DE number 2169552