2026/06/19 by Ryan Parker, Mark Stedman, Luca Capriotti · 1 voice
Economics, Econometrics and Finance · Physics and Astronomy · #q-fin.CP #cond-mat.stat-mech #quant-ph
Using the path-integral formalism, we develop an accurate and easy-to-compute semi-analytical approximation for a general class of default intensity models. We illustrate the accuracy of the method by presenting results for the Black-Karasinski model for which the proposed approximation provides remarkably accurate results, even in regimes of high volatility and multi-year time horizons. The accuracy and the computational efficiency of the proposed approximation makes it a viable alternative to fully numerical schemes for a variety of applications in econometrics and derivatives pricing, including the computation of XVA for credit products. As a practical example, we consider the pricing of a quanto Credit Default Swap (CDS) under stochastic intensity of default and an FX devaluation model.