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

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• 作者：Wenting Chen^a ; Xinjiang He^b ; ^{xh016@uowmail.edu.au}
• 关键词：Credit default swaps ; Multi-scale ; Stochastic volatility ; Perturbation method ; Down-and-out binary option
• 刊名：Physica A: Statistical Mechanics and its Applications
• 出版年：2017
• 出版时间：15 February 2017
• 年：2017
• 卷：468
• 期：Complete
• 页码：425-433
• 全文大小：405 K
• 卷排序：468

文摘

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 O(ϵ+δ+ϵδ).