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

18 Pages Posted: 8 Jun 2010

See all articles by Damiano Brigo

Damiano Brigo

Imperial College London - Department of Mathematics

Naoufel El-Bachir

University of Reading - ICMA Centre

Date Written: 2008-06

Abstract

We develop and test a fast and accurate semi-analytical formula for single-name default swaptions in the context of a shifted square root jump diffusion (SSRJD) default intensity model. The model can be calibrated to the CDS term structure and a few default swaptions, to price and hedge other credit derivatives consistently. We show with numerical experiments that the model implies plausible volatility smiles.

Suggested Citation

Brigo, Damiano and El-Bachir, Naoufel, An Exact Formula for Default Swaptions’ Pricing in the SSRJD Stochastic Intensity Model (2008-06). Mathematical Finance, Vol. 20, Issue 3, pp. 365-382, July 2010. Available at SSRN: https://ssrn.com/abstract=1621995 or http://dx.doi.org/10.1111/j.1467-9965.2010.00401.x

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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