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Valuation of a Basket Loan Credit Default Swap

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  • Jin Liang
  • Yujing Zhou

Abstract

This paper provides a methodology for valuing a basket Loan CDS (LCDS) by considering both default and prepayment risks. Under ¡°top down¡± and intensity framework, using a single-factor model, correlated default and prepayment risks are considered, where the stochastic interest rate is used to be their common factor. All stochastic processes in the model are assumed to follow CIR processes. Through Feynman-Kac formula, we obtain a PDE problem and its closed-form solution. Numerical examples are provided.

Suggested Citation

  • Jin Liang & Yujing Zhou, 2010. "Valuation of a Basket Loan Credit Default Swap," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 1(1), pages 21-29, December.
    • Handle: RePEc:jfr:ijfr11:v:1:y:2010:i:1:p:21-29
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    File URL: http://www.sciedu.ca/journal/index.php/ijfr/article/view/71/33
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    File URL: http://www.sciedu.ca/journal/index.php/ijfr/article/view/71
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    References listed on IDEAS

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    1. Eligius M. T. Hendrix & Boglárka G.-Tóth, 2010. "Mathematical modeling, cases," Springer Optimization and Its Applications, in: Introduction to Nonlinear and Global Optimization, chapter 2, pages 7-29, Springer.
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    Cited by:

    1. Yuan Wu & Jin Liang, 2012. "Valuation of Loan Credit Default Swaps Correlated Prepayment and Default Risks with Stochastic Recovery Rate," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 3(2), pages 60-68, April.

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