Multiscale Intensity Models for Single Name Credit Derivatives

Download or read book Multiscale Intensity Models for Single Name Credit Derivatives written by Evan Papageorgiou and published by . This book was released on 2007 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the pricing of defaultable derivatives, such as bonds, bond options, and credit default swaps in the reduced form framework of intensity-based models. We use regular and singular perturbation expansions on the intensity of default from which we derive approximations for the pricing functions of these derivatives. In particular, we assume an Ornstein-Uhlenbeck process for the interest rate, and a two-factor diffusion model for the intensity of default. The approximation allows for computational efficiency in calibrating the model. Finally, empirical evidence on the existence of multiple scales is presented by the calibration of the model on corporate yield curves.