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Non-linear Gaussian sovereign CDS pricing models

Marco Realdon

Quantitative Finance, Pages: 1 - 20

Swansea University Author: Marco Realdon

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DOI (Published version): 10.1080/14697688.2018.1459808

Abstract

Prior literature indicates that quadratic models and the Black-Karasinki model are very promising for CDS pricing. This paper extends these models and the Black (1995) model for pricing sovereign CDS’s. Default intensity, default loss and liquidity intensity are all driven by Gaussian factors.For al...

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Published in: Quantitative Finance
ISSN: 1469-7688 1469-7696
Published: 2018
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URI: https://cronfa.swan.ac.uk/Record/cronfa39362
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first_indexed 2018-04-11T09:25:35Z
last_indexed 2020-06-18T18:54:04Z
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spelling 2020-06-18T13:45:56.8718603 v2 39362 2018-04-10 Non-linear Gaussian sovereign CDS pricing models 5866b5c5cf6e2ffc303c2c417d881bbe Marco Realdon Marco Realdon true false 2018-04-10 BAF Prior literature indicates that quadratic models and the Black-Karasinki model are very promising for CDS pricing. This paper extends these models and the Black (1995) model for pricing sovereign CDS’s. Default intensity, default loss and liquidity intensity are all driven by Gaussian factors.For all ten sovereigns in the sample quadratic models best fit CDS spreads, although also the Black-Karasinki and Black models perform well. Fourfactor quadratic models can best account for the joint effects on sovereign CDS spreads of default risk, default loss risk and liquidity risk, as no restriction to factors correlation is needed. Different specifications of CDS liquidity risk are tested and the best specification varies with the sovereign. For some sovereigns the Black model fares better thanBlack-Karasinki, but the opposite is true for other sovereigns. Journal Article Quantitative Finance 1 20 1469-7688 1469-7696 sovereign CDS pricing, discrete time quadratic model, Black model, Black-Karasinski model, method of lines, Extended Kalman Filter 31 12 2018 2018-12-31 10.1080/14697688.2018.1459808 COLLEGE NANME Accounting and Finance COLLEGE CODE BAF Swansea University 2020-06-18T13:45:56.8718603 2018-04-10T15:27:36.9218210 Marco Realdon 1 0039362-02092019112538.pdf AAMv3.pdf 2019-09-02T11:25:38.3570000 Output 252655 application/pdf Accepted Manuscript true 2019-12-09T00:00:00.0000000 false eng
title Non-linear Gaussian sovereign CDS pricing models
spellingShingle Non-linear Gaussian sovereign CDS pricing models
Marco Realdon
title_short Non-linear Gaussian sovereign CDS pricing models
title_full Non-linear Gaussian sovereign CDS pricing models
title_fullStr Non-linear Gaussian sovereign CDS pricing models
title_full_unstemmed Non-linear Gaussian sovereign CDS pricing models
title_sort Non-linear Gaussian sovereign CDS pricing models
author_id_str_mv 5866b5c5cf6e2ffc303c2c417d881bbe
author_id_fullname_str_mv 5866b5c5cf6e2ffc303c2c417d881bbe_***_Marco Realdon
author Marco Realdon
author2 Marco Realdon
format Journal article
container_title Quantitative Finance
container_start_page 1
publishDate 2018
institution Swansea University
issn 1469-7688
1469-7696
doi_str_mv 10.1080/14697688.2018.1459808
document_store_str 1
active_str 0
description Prior literature indicates that quadratic models and the Black-Karasinki model are very promising for CDS pricing. This paper extends these models and the Black (1995) model for pricing sovereign CDS’s. Default intensity, default loss and liquidity intensity are all driven by Gaussian factors.For all ten sovereigns in the sample quadratic models best fit CDS spreads, although also the Black-Karasinki and Black models perform well. Fourfactor quadratic models can best account for the joint effects on sovereign CDS spreads of default risk, default loss risk and liquidity risk, as no restriction to factors correlation is needed. Different specifications of CDS liquidity risk are tested and the best specification varies with the sovereign. For some sovereigns the Black model fares better thanBlack-Karasinki, but the opposite is true for other sovereigns.
published_date 2018-12-31T03:49:59Z
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score 11.036334

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