Computing the survival probability in the Madan–Unal credit risk model: application to the CDS market

Abstract

We obtain a quasi-analytical approximation of the survival probability in the credit risk model proposed in [Madan, D.B. and Unal, H., Pricing the risk of default. Rev. Deriv. Res., 1998, 2(2), 121–160]. Such a formula, which extensive numerical simulations reveal to be accurate and computationally fast, can also be employed for pricing credit default swaps (CDSs). Specifically, we derive a quasi-analytical approximate expression for CDS par spreads, and we use it to estimate the parameters of the model. The results obtained show a rather satisfactory agreement between theoretical and real market data.

Keywords:

• Default risk
• Survival probability
• Madan–Unal model
• Credit default swap
• CDS

Notes

No potential conflict of interest was reported by the authors.