Pricing Constant Maturity Credit Default Swaps Under Jump Dynamics

Journal of Credit Risk Vol. 5, No. 1, pp. 1-21, 2009

26 Pages Posted: 22 Jun 2010

See all articles by Henrik Jönsson

Henrik Jönsson

European Institute for Statistics, Probability, Operations Research and their Applications (EURANDOM)

Wim Schoutens

KU Leuven - Department of Mathematics

Date Written: February 10, 2009

Abstract

In this paper we discuss the pricing of Constant Maturity Credit Default Swaps (CMCDS) under single sided jump models. The CMCDS offers default protection in exchange for a floating premium which is periodically reset and indexed to the market spread on a CDS with constant maturity tenor written on the same reference name. By setting up a firm value model based on single sided \levy\ models we can generate dynamic spreads for the reference CDS. The valuation of the CMCDS can then easily be done by Monte Carlo simulation.

Keywords: Single sided Levy processes, Structural models, Credit risk, Default probability, Constant Maturity Credit Default Swaps, Monte Carlo methods

JEL Classification: C02, C15, C63, G12

Suggested Citation

Jönsson, Henrik and Schoutens, Wim, Pricing Constant Maturity Credit Default Swaps Under Jump Dynamics (February 10, 2009). Journal of Credit Risk Vol. 5, No. 1, pp. 1-21, 2009, Available at SSRN: https://ssrn.com/abstract=1628669

Henrik Jönsson (Contact Author)

European Institute for Statistics, Probability, Operations Research and their Applications (EURANDOM) ( email )

P.O Box 513
Eindhoven, 5600 MB
Netherlands

HOME PAGE: http://www.eurandom.nl

Wim Schoutens

KU Leuven - Department of Mathematics ( email )

Celestijnenlaan 200 B
Leuven, B-3001
Belgium

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