The valuation of the basket CDS in a primary-subsidiary model. (English) Zbl 1211.91237
Summary: This paper considers the valuation problem of basket CDSs. Based on the construction of total hazard rates, the paper develops the work of H. Zheng and L. Jiang [Finance Stoch. 13, No. 3, 445–469 (2009; Zbl 1195.91152)] from the homogeneous case to the primary-subsidiary heterogeneous case in the interacting intensity framework, and obtains the corresponding joint density of the default time. Moreover, the paper derives the valuation formulae for the basket CDSs with and without counterparty risk. Numerical results robustly show that, under certain conditions, using the analytical pricing formulae derived in this paper is more efficient than the Monte Carlo method for the basket CDS valuation.
MSC:
| 91G20 | Derivative securities (option pricing, hedging, etc.) |
| 91G40 | Credit risk |
| 91G80 | Financial applications of other theories |
Citations:
Zbl 1195.91152References:
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