This study combines the empirical estimation of a Double-Exponential Jump-Diffusion (DEJD) process for a CDS index and the use of estimated parameters to price options on the index. In the first step we find Maximum Likelihood estimates for the diffusion volatility, the Poisson jump frequencies,...

We demonstrate how the Double-Exponential Jump-Diffusion (DEJD) process can be used to value iTraxx CDS options based on historical returns of the underlying CDS index. In the first step we find Maximum Likelihood estimates for the volatility of the normal component of returns and the Poisson...