Pricing Basket Credit Default Swap: An Empirically-Based Simulation Study

Abstract:     
This paper deals with the impact of structure of dependency and the choice of procedures for rare-event simulation, on the pricing of multi-name credit derivatives such as basket credit default swap. A copula-based simulation procedure for pricing basket credit default swaps, under different structure of dependency, is presented here. The choice of copula and procedures for rare-event simulation govern the pricing of the basket credit default swap. Alternatives to the Gaussian copula are the Clayton copula and t-student copula under importance sampling procedures for simulation, which capture the dependence structure between the underlying variables at extreme values and certain values of the input random variables in a simulation, and have more impact, than others, on the parameter being estimated.

JEL Classifications: E47, G12, G13

Accepted Paper Series