RIS ID
111450
Abstract
In this paper, we consider the pricing of credit default swaps (CDSs) with the reference asset driven by a geometric Brownian motion with a multi-scale stochastic volatility (SV), which is a two-factor volatility process with one factor controlling the fast time scale and the other representing the slow time scale. A key feature of the current methodology is to establish an equivalence relationship between the CDS and the down-and-out binary option through the discussion of "no default" probability, while balancing the two SV processes with the perturbation method. An approximate but closed-form pricing formula for the CDS contract is finally obtained, whose accuracy is in the order of θ (ϵ+δ+ϵδ)
Publication Details
Chen, W. & He, X. (2017). Pricing credit default swaps under a multi-scale stochastic volatility model. Physica A: Statistical Mechanics and its Applications, 468 425-433.