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Valuation of credit default swaps via Bessel bridges

Author

Listed:
  • Hernández del Valle Gerardo
  • Pacheco-González Carlos

Abstract

A credit default swap (CDS) is a financial contract in which the holder of the instrument will be compensated in the event of a loan default. When available, CDS's are used to monitor the credit risk of countries and companies. In this work we develop a closed form procedure to value a CDS in the case in which the so-called "credit rate index" is modelled as a Bessel bridge of arbitrary order. In particular, these processes seem to capture the nature of a defaultable asset in the sense that they remain strictly positive before default, and thus enrich the existing literature in this field.

Suggested Citation

  • Hernández del Valle Gerardo & Pacheco-González Carlos, 2014. "Valuation of credit default swaps via Bessel bridges," Working Papers 2014-27, Banco de México.
    • Handle: RePEc:bdm:wpaper:2014-27
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    File URL: https://www.banxico.org.mx/publications-and-press/banco-de-mexico-working-papers/%7BDE7B4477-6488-9C9E-3F49-B3DDF9DC2BC2%7D.pdf
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    More about this item

    Keywords

    Credit default swap; Bessel bridge; hitting time; defaultable bond;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets

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