A Monte-Carlo based approach for pricing credit default swaps with regime switching

2018 ◽  
Vol 76 (7) ◽  
pp. 1758-1766 ◽  
Author(s):  
Xin-Jiang He ◽  
Wenting Chen
Keyword(s):  
Monte Carlo ◽  
Regime Switching ◽  
Credit Default Swaps ◽  
Credit Default

scholarly journals Analytically Pricing Credit Default Swaps Under a Regime-Switching Model

2019 ◽  
Vol 18 (03) ◽  
pp. 1950021
Author(s):  
Wenting Chen ◽  
Xin-Jiang He ◽  
Xinzi Qiu
Keyword(s):  
Regime Switching ◽  
Numerical Experiments ◽  
Credit Default Swap ◽  
Credit Default Swaps ◽  
Default Probability ◽  
Regime Switching Model ◽  
Switching Model ◽  
Credit Default ◽  
Default Swap ◽  
Closed Form Formula

In this paper, we consider the valuation of a CDS (credit default swap) contract when the reference asset is assumed to follow a regime-switching model with the volatility allowed to jump among different states. Our motivation originates from empirical evidence demonstrating the existence of regime-switching in real markets. The default probability is analytically derived first, based on which a closed-form formula for the CDS price is obtained so that it can be easily implemented for practical purposes. Finally, numerical experiments are carried out to show quantitatively some properties of the CDS price under the regime-switching model.

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