Enhancing credit default swap valuation with meshfree methods

Alexander Guarin, Xiaoquan Liu, Wing Lon Ng

Research output: Journal PublicationArticlepeer-review

10 Citations (Scopus)

Abstract

In this paper, we apply the meshfree radial basis function (RBF) interpolation to numerically approximate zero-coupon bond prices and survival probabilities in order to price credit default swap (CDS) contracts. We assume that the interest rate follows a Cox-Ingersoll-Ross process while the default intensity is described by the Exponential-Vasicek model. Several numerical experiments are conducted to evaluate the approximations by the RBF interpolation for one- and two-factor models. The results are compared with those estimated by the finite difference method (FDM). We find that the RBF interpolation achieves more accurate and computationally efficient results than the FDM. Our results also suggest that the correlation between factors does not have a significant impact on CDS spreads. Crown

Original languageEnglish
Pages (from-to)805-813
Number of pages9
JournalEuropean Journal of Operational Research
Volume214
Issue number3
DOIs
Publication statusPublished - Nov 2011
Externally publishedYes

Keywords

  • Default intensity
  • Finite difference methods
  • Radial basis function interpolation

ASJC Scopus subject areas

  • Computer Science (all)
  • Modelling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

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