Scandinavian Working Papers in Economics
Working Papers in Economics,
University of Gothenburg, Department of Economics
No 359: Pricing basket default swaps in a tractable shot-noise model
Alexander Herbertsson (), Jiwook Jang () and Thorsten Schmidt ()
Additional contact information
Alexander Herbertsson: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: Box 640, SE 40530 GÖTEBORG
Jiwook Jang: Department of Actuarial Studies, Faculty of Business and Economics, Macquarie University, Postal: NSW Australia 2109
Thorsten Schmidt: Department of Mathematics, University of Chemnitz, Postal: Reichen-, hainer Strasse 41,, 09126 Chemnitz, Germany
Abstract: We value CDS spreads and kth-to-default swap spreads in a tractable shot noise model. The default dependence is modelled by letting the individual jumps of the default intensity be driven by a common latent factor. The arrival of the jumps is driven by a Poisson process. By using conditional independence and properties of the shot noise processes we derive tractable closed-form expressions for the default distribution and the ordered survival distributions in a homogeneous portfolio. These quantities are then used to price and study CDS spreads and kth-to-default swap spreads as function of the model parameters. We study the kth-to-default spreads as function of the CDS spread, as well as other parameters in the model. All calibrations lead to perfect fits.
Keywords: Credit risk; intensity-based models; dependence modelling; shot noise; CDS; kth-to-default swaps
JEL-codes: C02; C63; G13; G32; G33
17 pages, April 27, 2009
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