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A Comparative Analysis of Basket Default Swaps Pricing Using the Stein Method

Pricing Partners Working Paper

19 Pages Posted: 6 Dec 2007 Last revised: 24 Dec 2007

Marian Ciuca

Pricing Partners

Dorinel Bastide

Pricing Partners

Eric Benhamou

Université Paris Est - Université Paris Est-Creteil

Date Written: December 19, 2007

Abstract

Using the Stein numerical method, introduced by El Karoui and Jiao {ElKJ} and El Karoui, Jiao and Kurtz {ElKJK}, we compare, in terms of accuracy and efficiency, the pricing of the basket default swaps (NTDs and CDO Tranches). In the Factor Copula Model framework, we compare the following copula functions: 1 factor and 3 factors Gaussian copula, Clayton copula, Marshall-Olkin copula, Double-t copula and Student copula. Stein numerical method is also compared with the Recursive method of Hull and White, with the Probability Generating Function method (an exact Fourier transform like method) and with the Monte Carlo method.

Keywords: Stein method, copula, CDO, credit derivatives

JEL Classification: G12,G13

Suggested Citation

Ciuca, Marian and Bastide, Dorinel and Benhamou, Eric, A Comparative Analysis of Basket Default Swaps Pricing Using the Stein Method (December 19, 2007). Available at SSRN: https://ssrn.com/abstract=1064381 or http://dx.doi.org/10.2139/ssrn.1064381

Marian Ciuca (Contact Author)

Pricing Partners ( email )

Paris Cybervillage
204 Rue de crimée
Paris, 75019
France

HOME PAGE: http://www.pricingpartners.com

Dorinel Bastide

Pricing Partners ( email )

Paris Cybervillage
204 Rue de crimée
Paris, 75019
France

HOME PAGE: http://www.pricingpartners.com

Eric Benhamou

Université Paris Est - Université Paris Est-Creteil ( email )

61 avenue du Général de Gaulle
Créteil, 940000
France

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