Pricing Credit Default Swaps Using Preference-Free Multifactor Affine and Quadratic Models

This paper derives analytical solutions for valuing credit default swaps (CDS) using preference-free multifactor affine and quadratic models, under the recovery of face value (RFV) assumption. We use a preference-free framework, which is independent of the market prices of risk, and yet allows the short rate process and the spread process to be time-homogeneous. The solutions allow arbitrary number of factors for the short rate and the default intensity, and nest the solutions of Longstaff, Mithal, and Neis [2003], and Pan and Singleton [2005]. The multifactor framework used in this paper allows a better fit with default-free bond prices and CDS spreads