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Simulation for risk management: a simulation-based credit default swap pricing approach under jump-diffusion

Authors:

Paul NaAuthors Info & Claims

WSC '03: Proceedings of the 35th conference on Winter simulation: driving innovation

Pages 360 - 363

Published: 07 December 2003 Publication History

Abstract

Diffusion-based Credit Default Swap (CDS) pricing models produce zero spreads for very short-term contracts, which contradict empirical data. We introduce a simulation-based CDS pricing approach that avoids the zero short-term spreads problem through a jump-diffusion process.

References

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Ahn, C. M. and H. E. Thompson. 1988. Jump-Diffusion Processes and the Term Structure of Interest Rates, Journal of Finance, 43, 155--174.

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Black, F. and J. C. Cox. 1976. Valuing corporate securities: Some effects of bond indenture provisions, Journal of Finance 31, 351--367.

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Duffie, D. and K. J. Singleton. 1995. Modeling term structures of defaultable bonds, Working paper, Stanford University Business School.

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Finger, C. C., V. Finkelstein, G. Pan, J.-P. Lardy, and T. Ta. 2001. CreditGrades: Technical Document, Risk-Metrics, New York.

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Giesecke, K. 2003. Credit Risk Modeling and Valuation: An Introduction, Working Paper, Cornell University.

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Jarrow, R. A., D. Lando, and S. Turnbull. 1994. A Markov model for the term structure of credit risk spreads, Working paper, Cornell University.

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Jarrow, R. A. and S. Turnbull. 1995. Pricing derivatives on financial securities. Review of Financial Studies 1, 427--445.

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Kou, S. G. 2001. A Jump Diffusion Model for Option Pricing with Three Properties: Leptokurtic Feature, Volatility Smile, and Analytical Tractability, working paper, Columbia University, New York.

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Longstaff, F. A. and E. S. Schwartz. 1995. A simple approach to valuing risky and floating rate debt," Journal of Finance 50, 789--819.

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Madan, D. B. and H. Unal. 1994. Pricing the risks of default, Working paper, The Wharton School of the University of Pennsylvania.

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Merton, R. C. 1974. On the Pricing of Corporate Debt: the Risk Structure of Interest Rates, Journal of Finance, 29, 449--470.

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Merton, R. C. 1976. Option Pricing when Underlying Stock Returns are Discontinuous, Journal of Financial Economics, 3, 125--144.

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Musiela, M. and M. Rutkowski. 1997. Martingale Methods in Financial Modelling, Springer, Berlin.

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Zhou, C. 1997. A Jump-Diffusion Approach to Modeling Credit Risk and Valuing Defaultable Securities, Finance and Economics Discussion Series 1997--15 / Board of Governors of the Federal Reserve System (U.S.).

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Zhou, C. 2001. The Term Structure of Credit Spreads with Jump Risk, Journal of Banking and Finance, 25, 2015--40.

Cited By

Joro TNiu ANa P(2004)A simulation-based First-to-Default (FTD) Credit Default Swap (CDS) pricing approach under jump-diffusionProceedings of the 36th conference on Winter simulation10.5555/1161734.1162037(1632-1636)Online publication date: 5-Dec-2004
https://dl.acm.org/doi/10.5555/1161734.1162037

Simulation for risk management: a simulation-based credit default swap pricing approach under jump-diffusion
1. Applied computing
  1. Enterprise computing
  2. Law, social and behavioral sciences

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Information & Contributors

Information

Published In

cover image ACM Conferences

WSC '03: Proceedings of the 35th conference on Winter simulation: driving innovation

December 2003

2094 pages

ISBN:0780381327

General Chair:
David Ferrin
Naperville, IL
,
Program Chair:
Douglas J. Morrice
The University of Texas at Austin, Austin, TX

Sponsors

IIE: Institute of Industrial Engineers
INFORMS/CS: Institute for Operations Research and the Management Sciences/College on Simulation
ASA: American Statistical Association
ACM: Association for Computing Machinery
SIGSIM: ACM Special Interest Group on Simulation and Modeling
IEEE/CS: Institute of Electrical and Electronics Engineers/Computer Society
NIST: National Institute of Standards and Technology
(SCS): The Society for Modeling and Simulation International
IEEE/SMCS: Institute of Electrical and Electronics Engineers/Systems, Man, and Cybernetics Society

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Winter Simulation Conference

Publication History

Published: 07 December 2003

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WSC03

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IIE
INFORMS/CS
ASA
ACM
SIGSIM
IEEE/CS
NIST
(SCS)
IEEE/SMCS

WSC03: Winter Simulation Conference 2003

December 7 - 10, 2003

Louisiana, New Orleans

Acceptance Rates

WSC '03 Paper Acceptance Rate 128 of 189 submissions, 68%;

Overall Acceptance Rate 3,413 of 5,075 submissions, 67%

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Cited By

Joro TNiu ANa P(2004)A simulation-based First-to-Default (FTD) Credit Default Swap (CDS) pricing approach under jump-diffusionProceedings of the 36th conference on Winter simulation10.5555/1161734.1162037(1632-1636)Online publication date: 5-Dec-2004
https://dl.acm.org/doi/10.5555/1161734.1162037

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