Pricing Credit Default Swaps Using Preference-Free Multifactor Affine and Quadratic Models

Posted: 7 May 2007 Last revised: 15 Aug 2019

See all articles by Natalia Beliaeva

Natalia Beliaeva

Suffolk University - Department of Finance

Sanjay K. Nawalkha

University of Massachusetts Amherst - Isenberg School of Management

Gloria M. Soto

University of Murcia - Faculty of Business and Economics

Date Written: May 1, 2007

Abstract

This paper derives analytical solutions for valuing credit default swaps (CDS) using preference-free multifactor affine and quadratic models, under the recovery of face value (RFV) assumption. We use a preference-free framework, which is independent of the market prices of risk, and yet allows the short rate process and the spread process to be time-homogeneous. The solutions allow arbitrary number of factors for the short rate and the default intensity, and nest the solutions of Longstaff, Mithal, and Neis [2003], and Pan and Singleton [2005]. The multifactor framework used in this paper allows a better fit with default-free bond prices and CDS spreads.

Keywords: credit default swaps, CDS, reduced form models, interest rate models, term structure models, affine, quadratic

JEL Classification: G11, G12, G13, G21, G22, G23, G32, G33

Suggested Citation

Beliaeva, Natalia and Nawalkha, Sanjay K. and Soto, Gloria M., Pricing Credit Default Swaps Using Preference-Free Multifactor Affine and Quadratic Models (May 1, 2007). Available at SSRN: https://ssrn.com/abstract=984595

Natalia Beliaeva

Suffolk University - Department of Finance ( email )

8 Ashburton Place-Beacon Hill
Boston, MA 02108-2770
United States

Sanjay K. Nawalkha (Contact Author)

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States
413-687-2561 (Phone)

Gloria M. Soto

University of Murcia - Faculty of Business and Economics ( email )

Spain

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