CDS pricing with long memory via fractional Lévy processes

Author:

Fink Holger1,Scherr Christian2

Affiliation:

1. Chair of Financial Econometrics, Institute of Statistics, Ludwig-Maximilians-Universität München, Akademiestr. 1, D-80799 Munich, Germany

2. Department of Statistics, Faculty of Business, Economics and Management Information Systems, University of Regensburg, D-93040 Regensburg, Germany

Abstract

In this paper, we consider spread rates of credit default swaps (CDSs) in a long memory fractional Lévy setting, i.e. where interest and hazard rates are driven by processes whose autocovariance functions decrease very slowly over time. Empirically, this property can be found in many variables like interest and hazard rates, but the usually applied Markovian models are unable to reflect this. Using earlier results on conditional distributions of fractional Lévy processes, we carry out an extensive analysis of parameter sensitivities useful for researchers and practitioners alike and derive an analytical pricing formula for CDS contracts. A first empirical application is provided as well.

Publisher

World Scientific Pub Co Pte Lt

Subject

General Medicine

Cited by 2 articles. 订阅此论文施引文献 订阅此论文施引文献,注册后可以免费订阅5篇论文的施引文献,订阅后可以查看论文全部施引文献

1. An Arbitrage-Free Real-World Model for Fractional Option Prices;The Journal of Derivatives;2021-03-25

2. The Credit Default Swap market contagion during recent crises: international evidence;Review of Quantitative Finance and Accounting;2018-06-05

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