TITLE:
Pricing Credit Default Swap under Fractional Vasicek Interest Rate Model
AUTHORS:
Ruili Hao, Yonghui Liu, Shoubai Wang
KEYWORDS:
Credit Default Swap; Bond; Contagious Risk; Fractional Vasicek Interest Rate Model; Looping Default
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.4 No.1,
January
10,
2014
ABSTRACT: This paper discusses the pricing problem of credit default swap in the fractional Brownian motion environment. As credit default swap is exposed to both the interest rate risk and the default risk, we assume that the default intensity of a firm depends on the stochastic interest rate and the default states of counterparty firms. The interest rate risk is reflected by the fractional Vasicek interest rate model. We model the firm’s default intensity under the looping default model and derive the pricing formulas of risky bonds and credit default swap.