The pricing of single name credit default swap based on jump-diffusion process and volatility with Markov regime shift
by Xianghua Liu; Xueping Xiao
International Journal of Services Technology and Management (IJSTM), Vol. 20, No. 1/2/3, 2014

Abstract: Credit derivatives are efficient tools to manage credit risk. The single name credit default swap (CDS) is one of the most popular credit derivatives. The pricing is the important issue for credit derivatives. By introducing the jump-diffusion process and volatility with Markov regime shift, the paper makes some research on the pricing problem of single name CDS, which the price of CDS is affected by both unpredictable idiosyncratic risk and systematic risk caused by the macroeconomic change. Monte Carlo simulations find that the price of CDS increases as the intensity and the amplitude of the jump-diffusion process increase. Furthermore, the CDS price depends on the initial state and transition intensity of the volatility of the firm value, which the former can reflect the influence of the macroeconomic situation.

Online publication date: Tue, 29-Jul-2014

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