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Attenuated Model of Pricing Credit Default Swap under the Fractional Brownian Motion Environment
School of Mathematics, Shanghai University of Finance and Economics, Shanghai, China
Faculty of Business and Economics, Macquarie University, Sydney, Australia
Department of Financial Mathematics, Shanghai Finance University, Shanghai, China
- 1 School of Mathematics, Shanghai University of Finance and Economics, Shanghai, China
- 2 Faculty of Business and Economics, Macquarie University, Sydney, Australia
- 3 Department of Financial Mathematics, Shanghai Finance University, Shanghai, China
Journal of Mathematical Finance·Volume 06 (2016)·Pages 247–259·Published 9 March 2016·DOI10.4236/jmf.2016.62021
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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.
KeywordsCredit Default SwapFractional Brownian MotionContagious RiskHyperbolic Attenuation EffectLooping Default
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