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Pricing Credit Default Swap under Fractional Vasicek Interest Rate Model
Department of Applied Mathematics, Shanghai Finance University, Shanghai, China
Department of Applied Mathematics, Shanghai Finance University, Shanghai, China; School of Business Information Management, Shanghai University of International Business and Economics, Shanghai, China
Department of Applied Mathematics, Shanghai University of Finance and Economics, Shanghai, China
- 1 Department of Applied Mathematics, Shanghai Finance University, Shanghai, China
- 2 Department of Applied Mathematics, Shanghai Finance University, Shanghai, China; School of Business Information Management, Shanghai University of International Business and Economics, Shanghai, China
- 3 Department of Applied Mathematics, Shanghai University of Finance and Economics, Shanghai, China
Journal of Mathematical Finance·Volume 04 (2013)·Pages 10–20·Published 20 December 2013·DOI10.4236/jmf.2014.41002
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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.
KeywordsCredit Default SwapBondContagious RiskFractional Vasicek Interest Rate ModelLooping Default
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