Journal of Shanghai Jiao Tong University

Journal of Shanghai Jiaotong University ›› 2011, Vol. 45 ›› Issue (12): 1852-1856.

• Mathematics • Previous Articles     Next Articles

Pricing of Credit Default Swap with a Hyperbolic Contagion Model

 WANG  An-Jiao-1, 2 , WU  Yan-Jin-1, YE  Zhong-Xing-1, 3   

  1. (1.Department of Mathematics, Shanghai Jiaotong University, Shanghai 200240, China;2.Shanghai Sanda Institute, Shanghai 201209, China; 3.School of Business Information Management, Shanghai Institute of Foreign Trade, Shanghai 201620, China)
  • Received:2010-12-17 Online:2011-12-31 Published:2011-12-31

Abstract: Under intensity framework, this paper studied the valuation of credit default swap (CDS), for a three-firms hyperbolic attenuation model with counterparty risk. By introducing a hyperbolic attenuation function to represent the effect of the default of one party on the other two parties, the attenuation effect was explored. The joint density function of default times for a special hyperbolic attenuation contagion model was derived by employing the method of change of measure. Using the arbitrage-free pricing principle in the complete market to price the swap rate of CDS, the closed-form solution was obtained.
 

Key words: intensity model, contagion effect, hyperbolic attenuation function, change of measure, credit default swap （CDS）

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