Valuation of credit default swaps via Bessel bridges

Gerardo Hernández del Valle; Carlos Pacheco-González

A credit default swap (CDS) is a financial contract in which the holder of the instrument will be compensated in the event of a loan default. When available, CDS's are used to monitor the credit risk of countries and companies. In this work we develop a closed form procedure to value a CDS in the case in which the so-called "credit rate index" is modelled as a Bessel bridge of arbitrary order. In particular, these processes seem to capture the nature of a defaultable asset in the sense that they remain strictly positive before default, and thus enrich the existing literature in this field.

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Year of publication:	2014
Authors:	Valle, Gerardo Hernández del ; Pacheco-González, Carlos
Publisher:	México : Banco de México
Subject:	Credit default swap \| Bessel bridge \| hitting time \| defaultable bond \| Kreditderivat \| Credit derivative \| Swap \| Optionspreistheorie \| Option pricing theory \| Kreditrisiko \| Credit risk \| Anleihe \| Bond \| Derivat \| Derivative \| Kreditversicherung \| Credit insurance \| Insolvenz \| Insolvency