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'Extended black' sovereign credit default swap pricing model

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  • Marco Realdon
  • Cheng Qin Shi

Abstract

This article presents and tests an 'Extended Black' sovereign Credit Default Swap (CDS) pricing model, whereby the default intensity is driven by truncated Gaussian latent factors. CDS pricing requires numerical solutions through finite differences, yet maximum likelihood estimation is still feasible. Empirical evidence from sovereign CDS rates supports the Extended Black model. The addition of a second truncated Gaussian latent factor driving the default intensity significantly improves performance.

Suggested Citation

  • Marco Realdon & Cheng Qin Shi, 2010. "'Extended black' sovereign credit default swap pricing model," Applied Economics Letters, Taylor & Francis Journals, vol. 17(12), pages 1133-1137.
    • Handle: RePEc:taf:apeclt:v:17:y:2010:i:12:p:1133-1137
    DOI: 10.1080/17446540902817627
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    References listed on IDEAS

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    1. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    2. Black, Fischer, 1995. "Interest Rates as Options," Journal of Finance, American Finance Association, vol. 50(5), pages 1371-1376, December.
    3. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(4), pages 627-627, November.
    4. 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.
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