Credit Events and the Valuation of Credit Derivatives of Basket Type |
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Authors: | Kijima Masaaki Muromachi Yukio |
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Institution: | (1) Faculty of Economics, Tokyo Metropolitan University, 1-1 Minami-Ohsawa, Hachiohji, Tokyo, 192-0397, Japan;(2) Financial Research Group, NLI Research Institute, 1-1-1, Yurakucho, Chiyoda-ku, Tokyo, 100-0006, Japan |
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Abstract: | Thispaper provides a simple model for valuing a credit derivativewhose payoff depends on the identity (or identities) of the first(or first two) to occur of a given list of credit events, suchas defaults. The joint survival probability of occurrence timesof credit events is formulated in terms of stochastic intensityprocesses under the assumption of conditional independence. Basedon the joint survival probability, we can easily obtain the pricingformulas of such credit derivatives under the risk-neutral valuationframework. When the default intensity processes follow the extendedVasicek model, closed-form solutions of the pricing formulasare given. |
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Keywords: | default intensity process risk-neutral valuation joint survival function conditional independence extended Vasicek model |
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