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A revised version of the Cathcart & El-Jahel model and its application to CDS market
The paper considers the pricing of credit default swaps (CDSs) using a revised version of the credit risk model proposed in Cathcart and El-Jahel (2003). Default occurs either the first time a signaling process breaches a threshold barrier or unexpectedly at the first jump of a Cox process. The inte...
Autores principales: | , , , |
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Formato: | Online Artículo Texto |
Lenguaje: | English |
Publicado: |
Springer International Publishing
2021
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Materias: | |
Acceso en línea: | https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8346788/ http://dx.doi.org/10.1007/s10203-021-00350-x |
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author | Radi, Davide Hoang, Vu Phuong Torri, Gabriele Dvořáčková, Hana |
author_facet | Radi, Davide Hoang, Vu Phuong Torri, Gabriele Dvořáčková, Hana |
author_sort | Radi, Davide |
collection | PubMed |
description | The paper considers the pricing of credit default swaps (CDSs) using a revised version of the credit risk model proposed in Cathcart and El-Jahel (2003). Default occurs either the first time a signaling process breaches a threshold barrier or unexpectedly at the first jump of a Cox process. The intensity of default depends on the risk-free interest rate, which follows a Vasicek process, instead of a Cox-Ingersoll-Ross process as in the original model. This offers two advantages. On the one hand, it allows us to account for negative interest rates which are recently observed, on the other hand, it simplifies the formula for pricing CDSs. The goodness of fit of the model is tested using a dataset of CDS credit spreads related to European companies. The results obtained show a rather satisfactory agreement between theoretical predictions and market data, which is identical to the one obtained with the original model. In addition, the values of the calibrated parameters result to be stable over time and the semi-closed form solution ensures a very fast implementation. |
format | Online Article Text |
id | pubmed-8346788 |
institution | National Center for Biotechnology Information |
language | English |
publishDate | 2021 |
publisher | Springer International Publishing |
record_format | MEDLINE/PubMed |
spelling | pubmed-83467882021-08-09 A revised version of the Cathcart & El-Jahel model and its application to CDS market Radi, Davide Hoang, Vu Phuong Torri, Gabriele Dvořáčková, Hana Decisions Econ Finan Original Research The paper considers the pricing of credit default swaps (CDSs) using a revised version of the credit risk model proposed in Cathcart and El-Jahel (2003). Default occurs either the first time a signaling process breaches a threshold barrier or unexpectedly at the first jump of a Cox process. The intensity of default depends on the risk-free interest rate, which follows a Vasicek process, instead of a Cox-Ingersoll-Ross process as in the original model. This offers two advantages. On the one hand, it allows us to account for negative interest rates which are recently observed, on the other hand, it simplifies the formula for pricing CDSs. The goodness of fit of the model is tested using a dataset of CDS credit spreads related to European companies. The results obtained show a rather satisfactory agreement between theoretical predictions and market data, which is identical to the one obtained with the original model. In addition, the values of the calibrated parameters result to be stable over time and the semi-closed form solution ensures a very fast implementation. Springer International Publishing 2021-08-07 2021 /pmc/articles/PMC8346788/ http://dx.doi.org/10.1007/s10203-021-00350-x Text en © The Author(s) 2021 https://creativecommons.org/licenses/by/4.0/Open AccessThis article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/ (https://creativecommons.org/licenses/by/4.0/) . |
spellingShingle | Original Research Radi, Davide Hoang, Vu Phuong Torri, Gabriele Dvořáčková, Hana A revised version of the Cathcart & El-Jahel model and its application to CDS market |
title | A revised version of the Cathcart & El-Jahel model and its application to CDS market |
title_full | A revised version of the Cathcart & El-Jahel model and its application to CDS market |
title_fullStr | A revised version of the Cathcart & El-Jahel model and its application to CDS market |
title_full_unstemmed | A revised version of the Cathcart & El-Jahel model and its application to CDS market |
title_short | A revised version of the Cathcart & El-Jahel model and its application to CDS market |
title_sort | revised version of the cathcart & el-jahel model and its application to cds market |
topic | Original Research |
url | https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8346788/ http://dx.doi.org/10.1007/s10203-021-00350-x |
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