IDEAS home Printed from https://ideas.repec.org/a/kap/compec/v46y2015i2p243-273.html
   My bibliography  Save this article

Investigating the Performance of Non-Gaussian Stochastic Intensity Models in the Calibration of Credit Default Swap Spreads

Author

Listed:
  • Michele Bianchi
  • Frank Fabozzi

Abstract

Most important financial models assume randomness is explained through a normal random variable because, in general, use of alternative models is obstructed by the difficulty of calibrating and simulating them. Here we empirically study credit default swap pricing models under a reduced-form framework assuming different dynamics for the default intensity process. We explore pricing performance and parameter stability during the highly volatile period from June 30, 2008 to December 31, 2010 for different classes of processes driven by Brownian motion, three non-Gaussian Lévy processes, and a Sato process. The models are analyzed from both a static and dynamic perspective. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Michele Bianchi & Frank Fabozzi, 2015. "Investigating the Performance of Non-Gaussian Stochastic Intensity Models in the Calibration of Credit Default Swap Spreads," Computational Economics, Springer;Society for Computational Economics, vol. 46(2), pages 243-273, August.
    • Handle: RePEc:kap:compec:v:46:y:2015:i:2:p:243-273
    DOI: 10.1007/s10614-014-9457-4
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s10614-014-9457-4
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s10614-014-9457-4?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Shibin Zhang & Xinsheng Zhang, 2008. "Exact Simulation of IG-OU Processes," Methodology and Computing in Applied Probability, Springer, vol. 10(3), pages 337-355, September.
    2. Ramaprasad Bhar, 2010. "Stochastic Filtering with Applications in Finance," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 7736, August.
    3. Peter Carr & Liuren Wu, 2010. "Stock Options and Credit Default Swaps: A Joint Framework for Valuation and Estimation," Journal of Financial Econometrics, Oxford University Press, vol. 8(4), pages 409-449, Fall.
    4. Sergio Mayordomo & Juan Ignacio Peña & Eduardo S. Schwartz, 2014. "Are All Credit Default Swap Databases Equal?," European Financial Management, European Financial Management Association, vol. 20(4), pages 677-713, September.
    5. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 5, pages 129-164, World Scientific Publishing Co. Pte. Ltd..
    6. Rama Cont, 2010. "Credit default swaps and financial stability," Post-Print hal-00545742, HAL.
    7. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," The Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
    8. Hull, John & Predescu, Mirela & White, Alan, 2004. "The relationship between credit default swap spreads, bond yields, and credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2789-2811, November.
    9. Kwamie Dunbar, 2008. "US corporate default swap valuation: the market liquidity hypothesis and autonomous credit risk," Quantitative Finance, Taylor & Francis Journals, vol. 8(3), pages 321-334.
    10. Brigo, Damiano & Hanzon, Bernard, 1998. "On some filtering problems arising in mathematical finance," Insurance: Mathematics and Economics, Elsevier, vol. 22(1), pages 53-64, May.
    11. Jun Pan & Kenneth J. Singleton, 2008. "Default and Recovery Implicit in the Term Structure of Sovereign CDS Spreads," Journal of Finance, American Finance Association, vol. 63(5), pages 2345-2384, October.
    12. Thomas Kokholm & Elisa Nicolato, 2010. "Sato Processes in Default Modelling," Applied Mathematical Finance, Taylor & Francis Journals, vol. 17(5), pages 377-397.
    13. Peter Carr & Hélyette Geman & Dilip B. Madan & Marc Yor, 2007. "Self‐Decomposability And Option Pricing," Mathematical Finance, Wiley Blackwell, vol. 17(1), pages 31-57, January.
    14. Hedibert F. Lopes & Ruey S. Tsay, 2011. "Particle filters and Bayesian inference in financial econometrics," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 30(1), pages 168-209, January.
    15. Cont, R., 2010. "Credit default swaps and financial stability," Financial Stability Review, Banque de France, issue 14, pages 35-43, July.
    16. Malik, S. & Pitt, M. K., 2011. "Modelling Stochastic Volatility with Leverage and Jumps: A Simulated Maximum Likelihood Approach via Particle Filtering," Working papers 318, Banque de France.
    17. Li, Junye, 2011. "Sequential Bayesian Analysis of Time-Changed Infinite Activity Derivatives Pricing Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(4), pages 468-480.
    18. Michele Leonardo Bianchi & Svetlozar T. Rachev & Frank J. Fabozzi, 2013. "Tempered stable Ornstein-Uhlenbeck processes: a practical view," Temi di discussione (Economic working papers) 912, Bank of Italy, Economic Research and International Relations Area.
    19. repec:dau:papers:123456789/1380 is not listed on IDEAS
    20. R. Cont, 2001. "Empirical properties of asset returns: stylized facts and statistical issues," Quantitative Finance, Taylor & Francis Journals, vol. 1(2), pages 223-236.
    21. Duan, Jin-Chuan & Simonato, Jean-Guy, 1999. "Estimating and Testing Exponential-Affine Term Structure Models by Kalman Filter," Review of Quantitative Finance and Accounting, Springer, vol. 13(2), pages 111-135, September.
    22. Benoit Mandelbrot, 2015. "The Variation of Certain Speculative Prices," World Scientific Book Chapters, in: Anastasios G Malliaris & William T Ziemba (ed.), THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 3, pages 39-78, World Scientific Publishing Co. Pte. Ltd..
    23. Chen, Ren-Raw & Cheng, Xiaolin & Fabozzi, Frank J. & Liu, Bo, 2008. "An Explicit, Multi-Factor Credit Default Swap Pricing Model with Correlated Factors," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(1), pages 123-160, March.
    24. Ren-Raw Chen & Xiaolin Cheng & Liuren Wu, 2013. "Dynamic Interactions Between Interest-Rate and Credit Risk: Theory and Evidence on the Credit Default Swap Term Structure-super-," Review of Finance, European Finance Association, vol. 17(1), pages 403-441.
    25. Junye Li, 2011. "Sequential Bayesian Analysis of Time-Changed Infinite Activity Derivatives Pricing Models," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 29(4), pages 468-480, October.
    26. Ole E. Barndorff‐Nielsen & Neil Shephard, 2001. "Non‐Gaussian Ornstein–Uhlenbeck‐based models and some of their uses in financial economics," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 63(2), pages 167-241.
    27. Ole E. Barndorff-Nielsen, 1997. "Processes of normal inverse Gaussian type," Finance and Stochastics, Springer, vol. 2(1), pages 41-68.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Piergiacomo Sabino & Nicola Cufaro Petroni, 2022. "Fast simulation of tempered stable Ornstein–Uhlenbeck processes," Computational Statistics, Springer, vol. 37(5), pages 2517-2551, November.
    2. Nicola Cufaro Petroni & Piergiacomo Sabino, 2020. "Tempered stable distributions and finite variation Ornstein-Uhlenbeck processes," Papers 2011.09147, arXiv.org.
    3. Gong, Xiaoli & Zhuang, Xintian, 2017. "American option valuation under time changed tempered stable Lévy processes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 466(C), pages 57-68.
    4. Michele Leonardo Bianchi & Svetlozar T. Rachev & Frank J. Fabozzi, 2018. "Calibrating the Italian Smile with Time-Varying Volatility and Heavy-Tailed Models," Computational Economics, Springer;Society for Computational Economics, vol. 51(3), pages 339-378, March.
    5. Gong, Xiao-li & Zhuang, Xin-tian, 2016. "Option pricing and hedging for optimized Lévy driven stochastic volatility models," Chaos, Solitons & Fractals, Elsevier, vol. 91(C), pages 118-127.
    6. Nicola Cufaro Petroni & Piergiacomo Sabino, 2020. "Gamma Related Ornstein-Uhlenbeck Processes and their Simulation," Papers 2003.08810, arXiv.org.
    7. Ayub Ahmadi & Mahdieh Tahmasebi, 2024. "Pricing and delta computation in jump-diffusion models with stochastic intensity by Malliavin calculus," Papers 2405.00473, arXiv.org.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Michele Leonardo Bianchi, 2012. "An empirical comparison of alternative credit default swap pricing models," Temi di discussione (Economic working papers) 882, Bank of Italy, Economic Research and International Relations Area.
    2. Augustin, Patrick & Subrahmanyam, Marti G. & Tang, Dragon Yongjun & Wang, Sarah Qian, 2014. "Credit Default Swaps: A Survey," Foundations and Trends(R) in Finance, now publishers, vol. 9(1-2), pages 1-196, December.
    3. Michele Leonardo Bianchi & Svetlozar T. Rachev & Frank J. Fabozzi, 2018. "Calibrating the Italian Smile with Time-Varying Volatility and Heavy-Tailed Models," Computational Economics, Springer;Society for Computational Economics, vol. 51(3), pages 339-378, March.
    4. Peter Christoffersen & Christian Dorion & Kris Jacobs & Lotfi Karoui, 2014. "Nonlinear Kalman Filtering in Affine Term Structure Models," Management Science, INFORMS, vol. 60(9), pages 2248-2268, September.
    5. Giulia Di Nunno & Kk{e}stutis Kubilius & Yuliya Mishura & Anton Yurchenko-Tytarenko, 2023. "From constant to rough: A survey of continuous volatility modeling," Papers 2309.01033, arXiv.org, revised Sep 2023.
    6. Benbouzid, Nadia & Mallick, Sushanta K. & Sousa, Ricardo M., 2017. "Do country-level financial structures explain bank-level CDS spreads?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 48(C), pages 135-145.
    7. Guarin, Alexander & Liu, Xiaoquan & Ng, Wing Lon, 2014. "Recovering default risk from CDS spreads with a nonlinear filter," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 87-104.
    8. Yalin Gündüz & Marliese Uhrig-Homburg, 2014. "Does modeling framework matter? A comparative study of structural and reduced-form models," Review of Derivatives Research, Springer, vol. 17(1), pages 39-78, April.
    9. Guarin, Alexander & Liu, Xiaoquan & Ng, Wing Lon, 2011. "Enhancing credit default swap valuation with meshfree methods," European Journal of Operational Research, Elsevier, vol. 214(3), pages 805-813, November.
    10. Ramaprasad Bhar, 2010. "Stochastic Filtering with Applications in Finance," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 7736, August.
    11. Alessandro Andreoli & Luca Vincenzo Ballestra & Graziella Pacelli, 2018. "Pricing Credit Default Swaps Under Multifactor Reduced-Form Models: A Differential Quadrature Approach," Computational Economics, Springer;Society for Computational Economics, vol. 51(3), pages 379-406, March.
    12. Diaz Weigel, Diana & Gemmill, Gordon, 2006. "What drives credit risk in emerging markets? The roles of country fundamentals and market co-movements," Journal of International Money and Finance, Elsevier, vol. 25(3), pages 476-502, April.
    13. Chiarella, Carl & Fanelli, Viviana & Musti, Silvana, 2011. "Modelling the evolution of credit spreads using the Cox process within the HJM framework: A CDS option pricing model," European Journal of Operational Research, Elsevier, vol. 208(2), pages 95-108, January.
    14. Samuel Chege Maina, 2011. "Credit Risk Modelling in Markovian HJM Term Structure Class of Models with Stochastic Volatility," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2011, January-A.
    15. Makushkin, Mikhail & Lapshin, Victor, 2023. "Dynamic Nelson–Siegel model for market risk estimation of bonds: Practical implementation," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 69, pages 5-27.
    16. Ole E. Barndorff-Nielsen, 2004. "Power and Bipower Variation with Stochastic Volatility and Jumps," Journal of Financial Econometrics, Oxford University Press, vol. 2(1), pages 1-37.
    17. Albrecher, Hansjoerg & Guillaume, Florence & Schoutens, Wim, 2013. "Implied liquidity: Model sensitivity," Journal of Empirical Finance, Elsevier, vol. 23(C), pages 48-67.
    18. Zinna, Gabriele, 2013. "Sovereign default risk premia: Evidence from the default swap market," Journal of Empirical Finance, Elsevier, vol. 21(C), pages 15-35.
    19. Enrico Laghi & Michele Di Marcantonio & Eugenio D'Amico, 2014. "Estimating credit default swap spreads using accounting data, market quotes and credit ratings: the European Banks Case," FINANCIAL REPORTING, FrancoAngeli Editore, vol. 2014(2-3-4), pages 59-81.
    20. Li Chen & Damir Filipovic, 2003. "A Simple Model for Credit Migration and Spread Curves," Finance 0305003, University Library of Munich, Germany.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:compec:v:46:y:2015:i:2:p:243-273. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.