Article2005

CDS Market Formulas and Models

Damiano Brigo · Massimo Morini · Ateneo Nuovo

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Stochastic processes and financial applications Financial Risk and Volatility Modeling Credit Risk and Financial Regulations

Abstract

In this work we analyze market payoffs of Credit Default Swaps (CDS) and we derive rigorous standard market formulas for pricing options on CDS. Formulas are based on modelling CDS spreads which are consistent with simple market payoffs, and we introduce a subfiltration structure allowing all measures to be equivalent to the risk neutral measure. Then we investigate market CDS spreads through change of measure and consider possible choices of rates for modelling a complete term structure of CDS spreads. We also consider approximations and apply them to pricing of specific market contracts. Results are derived in a probabilistic framework similar to that of Jamshidian (2004).

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References

2001Interest Rate Models Theory and Practice 2004Credit Risk: Modeling, Valuation and Hedging 2004Valuation of credit default swaps and swaptions 2003The Valuation of Credit Default Swap Options 2002Default Risk and Hazard Process 2005Market Models for CDS Options and Callable Floaters 2000A Libor Market Model with Default Risk 2004Candidate Market Models and the Calibrated Cir++ Stochastic Intensity Model for Credit Default Swap Options and Callable Floaters

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2021Four-factor model of Quanto CDS with jumps-at-default and stochastic recovery 2010Hedging of a credit default swaption in the CIR default intensity model 2009VALUATION OF CREDIT DEFAULT SWAPTIONS AND CREDIT DEFAULT INDEX SWAPTIONS

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