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Empirical Study of Intensity-Based Credit Default Swap Pricing Models

ФИО студента: Dimitriy Samoylov

Руководитель: Dmitriy Alexandrovich Kachalov

Кампус/факультет: International College of Economics and Finance

Программа: Double degree programme in Economics of the NRU HSE and the University of London (Bachelor)

Год защиты: 2018

Most of the important financial models rely on the normality assumption. There is, however, a considerable evidence – including the issue related to the underestimation of extreme events during the 2008 financial crisis – that the normal distribution does not provide enough flexibility in terms of explaining the stylized facts. This study looks into alternative models for credit risk instruments, particularly, credit default swaps, which exhibit heavy dependence on jumps and extreme events. In order to account for this feature, the jumps are introduced into the intensity process, which is then used to price credit default swaps under the reduced-form framework. After reviewing the theoretical background of the models based on the Brownian motion, the non-Gaussian Lévy process and the Sato process, the paper explores the empirical performance of the models in terms of the pricing error, performance adjusted for the market behavior and the parameter stability. Each model is assessed under the no-arbitrage condition following the static perspective methodology.

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