An exact formula for default swaptions' pricing in the SSRJD stochastic intensity model

2008/12/22 by Damiano Brigo, Brigo, Damiano, Naoufel El-Bachir +1
Economics, Econometrics and Finance · #Credit Risk and Financial Regulations #Stochastic processes and financial applications

paper · pdf · doi:10.48550/arxiv.0812.4199

Abstract

We develop and test a fast and accurate semi-analytical formula for single-name default swaptions in the context of a shifted square root jump diffusion (SSRJD) default intensity model. The model can be calibrated to the CDS term structure and a few default swaptions, to price and hedge other credit derivatives consistently. We show with numerical experiments that the model implies plausible volatility smiles.

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