Pricing Credit Default Swaps Using Preference-Free Multifactor Affine and Quadratic Models
Posted: 7 May 2007 Last revised: 15 Aug 2019
Date Written: May 1, 2007
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 , and Pan and Singleton . 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
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