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.

(2021). A revised version of the Cathcart & El-Jahel model and its application to CDS market [journal article - articolo]. In DECISIONS IN ECONOMICS AND FINANCE. Retrieved from http://hdl.handle.net/10446/190665

A revised version of the Cathcart & El-Jahel model and its application to CDS market

Radi, Davide;Torri, Gabriele;
2021-01-01

Abstract

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.
articolo
2021
Radi, Davide; Hoang, V. P.; Torri, Gabriele; Dvorackova, H.
(2021). A revised version of the Cathcart & El-Jahel model and its application to CDS market [journal article - articolo]. In DECISIONS IN ECONOMICS AND FINANCE. Retrieved from http://hdl.handle.net/10446/190665
File allegato/i alla scheda:
File Dimensione del file Formato  
Radi2021_Article_ARevisedVersionOfTheCathcartEl.pdf

accesso aperto

Versione: publisher's version - versione editoriale
Licenza: Creative commons
Dimensione del file 977.36 kB
Formato Adobe PDF
977.36 kB Adobe PDF Visualizza/Apri
Pubblicazioni consigliate

Aisberg ©2008 Servizi bibliotecari, Università degli studi di Bergamo | Terms of use/Condizioni di utilizzo

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10446/190665
Citazioni
  • Scopus 1
  • ???jsp.display-item.citation.isi??? 1
social impact