Paper: Oct 04,2024
q-fin.MF
ID:2410.02645
Efficient calibration of the shifted square-root diffusion model to credit default swap spreads using asymptotic approximations
We derive a closed-form approximation for the credit default swap (CDS)
spread in the two-dimensional shifted square-root diffusion (SSRD) model using
asymptotic coefficient expansion technique to approximate solutions of
nonlinear partial differential equations. Specifically, we identify the Cauchy
problems associated with two terms in the CDS spread formula that lack
analytical solutions and derive asymptotic approximations for these terms. Our
approximation does not require the assumption of uncorrelated interest rate and
default intensity processes as typically required for calibration in the SSRD
model. Through several calibration studies using market data on CDS spread, we
demonstrate the accuracy and efficiency of our proposed formula.
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Paper Author: Ankush Agarwal,Ying Liao
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