TITLE:
Attenuated Model of Pricing Credit Default Swap under the Fractional Brownian Motion Environment
AUTHORS:
Wenjing Gu, Yinglin Liu, Ruili Hao
KEYWORDS:
Credit Default Swap, Fractional Brownian Motion, Contagious Risk, Hyperbolic Attenuation Effect, Looping Default
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.6 No.2,
March
9,
2016
ABSTRACT: This paper mainly discusses the pricing of credit default swap (CDS) in the fractional dimension environment. We assume that the default intensity of a firm depends on the default states of counterparty firms and the term structure of interest rates, but the contagious impact of the counterparty firm is decreasing over time, until disappears. The interest rate risk is reflected by the fractional Vasicek interest rate model. We model the firm’s default intensity in the looping default framework and derive the pricing formulas of risky bonds and credit default swap.