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Enhancing credit default swap valuation with meshfree methods

Guarin, Alexander and Liu, Xiaoquan and Ng, Wing Lon (2011) 'Enhancing credit default swap valuation with meshfree methods.' European Journal of Operational Research, 214 (3). pp. 805-813. ISSN 03772217

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Abstract

In this paper, we apply the meshfree radial basis function (RBF) interpolation to numerically approximate zero-coupon bond prices and survival probabilities in order to price credit default swap (CDS) contracts. We assume that the interest rate follows a Cox–Ingersoll–Ross process while the default intensity is described by the Exponential-Vasicek model. Several numerical experiments are conducted to evaluate the approximations by the RBF interpolation for one- and two-factor models. The results are compared with those estimated by the finite difference method (FDM). We find that the RBF interpolation achieves more accurate and computationally efficient results than the FDM. Our results also suggest that the correlation between factors does not have a significant impact on CDS spreads.

Item Type: Article
Uncontrolled Keywords: Radial basis function interpolation; Finite difference methods; Default intensity
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Science and Health > Computer Science and Electronic Engineering, School of > Centre for Computational Finance and Economic Agents
Depositing User: Xiaoquan Liu
Date Deposited: 15 Nov 2011 10:29
Last Modified: 14 Dec 2012 12:12
URI: http://repository.essex.ac.uk/id/eprint/1508

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