Pricing Credit Default Swap under Fractional Vasicek Interest Rate Model

Ruili Hao, Yonghui Liu, Shoubai Wang

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.

DOI: 10.4236/jmf.2014.41002                

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.

Keywords

Credit Default Swap; Bond; Contagious Risk; Fractional Vasicek Interest Rate Model; Looping Default

Conflicts of Interest

The authors declare no conflicts of interest.

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