Basket CDS pricing with default intensities using a regime-switching shot-noise model

ABSTRACT

In this paper, we employ an intensity-based credit risk model with regime-switching to study the valuation of basket CDS in a homogeneous portfolio. We assume that the default intensities are described by some dependent regime-switching shot-noise processes and the individual jumps of the intensity are driven by a common factor. By using the conditional Laplace transform of the regime-switching shot-noise process, we obtain the closed form results for pricing the fair spreads of the basket CDS. We present some numerical examples to illustrate the effect of the model parameters on the fair spreads.

KEYWORDS:

• Basket CDS
• default intensity
• regime-switching
• shot-noise process.

MATHEMATICS SUBJECT CLASSIFICATION:

• 44A10
• 49K15

Acknowledgments

We are grateful to the anonymous referees for valuable suggestions which result in an improvement of the original manuscript.

Additional information

Funding

Jie Guo is supported by the NNSF of China [grant number 11671291] and the Research Innovation Program for College Graduates of Jiangsu Province [grant number KYZZ16-0075]. Yinghui Dong is supported by the NSF of Jiangsu Province [grant number BK20170064], Qing Lan Project and the scholarship of Jiangsu Overseas Visiting Scholar Program. Guojing Wang is supported by the NNSF of China [grant number 11371274] and the Open Project of Jiangsu Key Laboratory of Financial Engineering [grant number NSK2015-05].