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Quantitative Finance > Pricing of Securities

arXiv:0912.3028 (q-fin)
[Submitted on 15 Dec 2009]

Title:Credit Default Swap Calibration and Equity Swap Valuation under Counterparty Risk with a Tractable Structural Model

Authors:Damiano Brigo, Marco Tarenghi
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Abstract: In this paper we develop a tractable structural model with analytical default probabilities depending on some dynamics parameters, and we show how to calibrate the model using a chosen number of Credit Default Swap (CDS) market quotes. We essentially show how to use structural models with a calibration capability that is typical of the much more tractable credit-spread based intensity models. We apply the structural model to a concrete calibration case and observe what happens to the calibrated dynamics when the CDS-implied credit quality deteriorates as the firm approaches default. Finally we provide a typical example of a case where the calibrated structural model can be used for credit pricing in a much more convenient way than a calibrated reduced form model: The pricing of counterparty risk in an equity swap.
Comments: Reduced version in Proceedings of the FEA 2004 Conference at MIT, Cambridge, Massachusetts, November 8-10, and in: Pykhtin, M. (Editor), Counterparty Credit Risk Modeling: Risk Management, Pricing and Regulation. Risk Books, 2005, London
Subjects: Pricing of Securities (q-fin.PR); Computational Finance (q-fin.CP)
Cite as: arXiv:0912.3028 [q-fin.PR]
  (or arXiv:0912.3028v1 [q-fin.PR] for this version)
  https://doi.org/10.48550/arXiv.0912.3028

Submission history

From: Damiano Brigo [view email]
[v1] Tue, 15 Dec 2009 23:47:46 UTC (59 KB)
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