An Exact Formula for Default Swaptions' Pricing in the SSRJD Stochastic Intensity Model

ICMA Centre Discussion Papers in Finance No. 2007-14

18 Pages Posted: 14 Nov 2007

See all articles by Damiano Brigo

Damiano Brigo

Imperial College London - Department of Mathematics

Naoufel El-Bachir

University of Reading - ICMA Centre

Date Written: November 2007

Abstract

We develop and test a fast and accurate semi-analytical formula for single-name default swaptions in the context of the shifted square root jump diffusion (SSRJD) default intensity model. The formula consists of a decomposition of an option on a summation of survival probabilities in a summation of options on the underlying survival probabilities, where the strike for each option is adjusted.

Keywords: Credit derivatives, Credit Default Swap, Credit Default Swaption, Jump-diffusion, Stochastic intensity, Doubly stochastic poisson process, Cox process, Semi-Analytic formula, Numerical integration

JEL Classification: C63, C65, G12, G13

Suggested Citation

Brigo, Damiano and El-Bachir, Naoufel, An Exact Formula for Default Swaptions' Pricing in the SSRJD Stochastic Intensity Model (November 2007). ICMA Centre Discussion Papers in Finance No. 2007-14. Available at SSRN: https://ssrn.com/abstract=1029903 or http://dx.doi.org/10.2139/ssrn.1029903

Damiano Brigo (Contact Author)

Imperial College London - Department of Mathematics ( email )

South Kensington Campus
London SW7 2AZ, SW7 2AZ
United Kingdom

HOME PAGE: http://www.imperial.ac.uk/people/damiano.brigo

Naoufel El-Bachir

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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