Stochastic credit default swap pricing

Download

index.pdf

Date

2012

Author

Gökgöz, İsmail Hakkı

Metadata

Show full item record

Item Usage Stats

259
views

72
downloads

Credit risk measurement and management has great importance in credit market. Credit derivative products are the major hedging instruments in this market and credit default swap contracts (CDSs) are the most common type of these instruments. As observed in credit crunch (credit crisis) that has started from the United States and expanded all over the world, especially crisis of Iceland, CDS premiums (prices) are better indicative of credit risk than credit ratings. Therefore, CDSs are important indicators for credit risk of an obligor and thus these products should be understood by market participants well enough. In this thesis, initially, advanced credit risk models firsts, the structural (firm value) models, Merton Model and Black-Cox constant barrier model, and the intensity-based (reduced-form) models, Jarrow-Turnbull and Cox models, are studied. For each credit risk model studied, survival probabilities are calculated. After explaining the basic structure of a single name CDS contract, by the help of the general pricing formula of CDS that result from the equality of in and out cash flows of these contracts, CDS price for each structural models (Merton model and Black-Cox constant barrier model) and CDS price for general type of intensity based models are obtained. Before the conclusion, default intensities are obtained from the distribution functions of default under two basic structural models; Merton and Black-Cox constant barrier. Finally, we conclude our work with some inferences and proposals.

Subject Keywords

Probabilities., Swaps (Finance)., Credit derivatives., Default (Finance).

URI

http://etd.lib.metu.edu.tr/upload/12614921/index.pdf
https://hdl.handle.net/11511/21770

Collections

Graduate School of Applied Mathematics, Thesis

Suggestions

OpenMETU
Core

Statistical methods in credit rating Sezgin, Özge; Yıldırak, Şahap Kasırga; Department of Financial Mathematics (2006) Credit risk is one of the major risks banks and financial institutions are faced with. With the New Basel Capital Accord, banks and financial institutions have the opportunity to improve their risk management process by using Internal Rating Based (IRB) approach. In this thesis, we focused on the internal credit rating process. First, a short overview of credit scoring techniques and validation techniques was given. By using real data set obtained from a Turkish bank about manufacturing firms, default predi...
The Valuation of government guarantees provided for municipalities Mert, Mehmet Esat; Duran, Serhan; İyigün, Cem; Department of Industrial Engineering (2015) Credit risk is defined as the risk of portfolio value variations due to unforeseeable fluctuations in the credit quality of a party in a financial contract. The operations that create receivable and contingent liability are the basic sources of credit risk. Credit risk models are needed in order to quantify the risk related to these sources better and minimize them by monitoring regularly. Although credit risk models are widely used in private sector, there are also usage areas for various operations of the...
Stochastic volatility, a new approach for vasicek model with stochastic volatility Zeytun, Serkan; Hayfavi, Azize; Department of Financial Mathematics (2005) In the original Vasicek model interest rates are calculated assuming that volatility remains constant over the period of analysis. In this study, we constructed a stochastic volatility model for interest rates. In our model we assumed not only that interest rate process but also the volatility process for interest rates follows the mean-reverting Vasicek model. We derived the density function for the stochastic element of the interest rate process and reduced this density function to a series form. The para...
Optimizable multiresolution quadratic variation filter for high-frequency financial data Şen, Aykut; Akyıldız, Ersan; Department of Financial Mathematics (2009) As the tick-by-tick data of financial transactions become easier to reach, processing that much of information in an efficient and correct way to estimate the integrated volatility gains importance. However, empirical findings show that, this much of data may become unusable due to microstructure effects. Most common way to get over this problem is to sample the data in equidistant intervals of calendar, tick or business time scales. The comparative researches on that subject generally assert that, the most...
Credit default swap valuation: an application via stochastic intensity models Namuslu, Merve; Danışoğlu, Seza; Ayaydın Hacıömeroğlu, Hande; Department of Financial Mathematics (2016) The objective of this thesis is to study the pricing of a single-name credit default swap (CDS) contract via the discounted cash flow method with reduced-form survival probability functions depending on stochastic intensity. The ability of the model in predicting the market-observed spreads is tested as well by using bond and CDS data from the US market. In credit risk modeling, the CIR (Cox-Ingersoll-Ross) model is used. The main reason for using a reduced-form model in pricing the CDS contracts is the adv...

Citation Formats

İ. H. Gökgöz, “Stochastic credit default swap pricing,” M.S. - Master of Science, Middle East Technical University, 2012.