D. Brigo and M. Tarenghi (Italy)
Credit Derivatives, Modelling and Simulation, Calibration, Structural Models, Credit Default Swap, Valuation.
Modelling firms default is becoming more and more impor tant, especially in recent times where the market is experi encing a large development in credit derivatives trading. In this paper we develop a tractable structural model with an alytical default probabilities depending on some dynamics parameters, and we show how to calibrate the model us ing a chosen number of Credit Default Swap (CDS) market quotes. We apply the structural model to a concrete cal ibration case and observe what happens to the calibrated dynamics when the CDS-implied credit quality deteriorates as the firm approaches default. The paper essentially shows how to use structural models with a calibration capabil ity that is typical of the much more tractable credit-spread based intensity models.
Important Links:
Go Back
