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|Title:||Pricing Credit Default Swaps Under Levy Models|
|Authors:||CARIBONI Jessica; WIM Schoutens|
|Citation:||Journal of Computational Finance vol. 10 no. 4 p. 71-91|
|Publisher:||Incisive Media Investments Ltd|
|Type:||Articles in periodicals and books|
|Abstract:||Most structural models for credit pricing assume Geometric Brownian motion to describe the firm asset value. However, the underlying lognormal distribution does not match empirical distributions, typically skewed and leptokurtic. Moreover, defaults are usually driven by shocks, which are not captured by the continuous paths of Brownian motion. We assume the asset price process is driven by a pure-jump Lévy process and default is triggered by the crossing of a preset barrier. Our model incorporates asymmetry, fat-tail behaviour, jumps and instantaneous defaults. Under this model we price Credit Default Swaps, detailing the calculations for the Variance Gamma process.|
|JRC Directorate:||Space, Security and Migration|
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