- Volume 19 Issue 1
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A MULTIVARIATE JUMP DIFFUSION PROCESS FOR COUNTERPARTY RISK IN CDS RATES
- Ramli, Siti Norafidah Mohd (School of Mathematical Sciences, National University of Malaysia) ;
- Jang, Jiwook (Department of Applied Finance & Actuarial Studies, Macquarie University)
- Received : 2015.01.15
- Accepted : 2015.03.02
- Published : 2015.03.25
We consider counterparty risk in CDS rates. To do so, we use a multivariate jump diffusion process for obligors' default intensity, where jumps (i.e. magnitude of contribution of primary events to default intensities) occur simultaneously and their sizes are dependent. For these simultaneous jumps and their sizes, a homogeneous Poisson process. We apply copula-dependent default intensities of multivariate Cox process to derive the joint Laplace transform that provides us with joint survival/default probability and other relevant joint probabilities. For that purpose, the piecewise deterministic Markov process (PDMP) theory developed in  and the martingale methodology in  are used. We compute survival/default probability using three copulas, which are Farlie-Gumbel-Morgenstern (FGM), Gaussian and Student-t copulas, with exponential marginal distributions. We then apply the results to calculate CDS rates assuming deterministic rate of interest and recovery rate. We also conduct sensitivity analysis for the CDS rates by changing the relevant parameters and provide their figures.
Supported by : Malaysian Ministry of Higher Education
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