Constant Maturity Credit Default Swap Pricing with Market Models

24 Pages Posted: 3 Jan 2005  

Damiano Brigo

Imperial College London - Department of Mathematics

Date Written: December 2004

Abstract

In this work we derive an approximated no-arbitrage market valuation formula for Constant Maturity Credit Default Swaps (CMCDS). We move from the CDS options market model in Brigo (2004), and derive a formula for CMCDS that is the analogous of the formula for constant maturity swaps in the default free swap market under the LIBOR market model.

A convexity adjustment-like correction is present in the related formula. Without such correction, or with zero correlations, the formula returns an obvious deterministic-credit-spread expression for the CMCDS price. To obtain the result we derive a joint dynamics of forward CDS rates under a single pricing measure, as in Brigo (2004). Numerical examples of the convexity adjustment impact complete the paper.

Keywords: CDS Options, CDS Options Market Model, Constant Maturity CDS, Convexity Adjustment, Participation Rate, CDS rates volatility, CDS rates correlation

JEL Classification: G13

Suggested Citation

Brigo, Damiano, Constant Maturity Credit Default Swap Pricing with Market Models (December 2004). Available at SSRN: https://ssrn.com/abstract=639022 or http://dx.doi.org/10.2139/ssrn.639022

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

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