Publication details
Pricing Credit Default Swaps under the scaled constant elasticity of variance model
| Authors | |
|---|---|
| Year of publication | 2025 |
| Type | Article in Periodical |
| Magazine / Source | IMA JOURNAL OF MANAGEMENT MATHEMATICS |
| MU Faculty or unit | |
| Citation | |
| web | https://academic.oup.com/imaman/advance-article/doi/10.1093/imaman/dpaf032/8221730 |
| Doi | https://doi.org/10.1093/imaman/dpaf032 |
| Keywords | scaled Brownian motion; first-passage time; CEV model; credit default swaps; squared Bessel process |
| Attached files | |
| Description | This paper explores the capabilities of the Constant Elasticity of Variance model driven by scaled Brownian motion (sCEV) to address default-related financial problems, particularly the pricing of Credit Default Swaps (CDS). The first-passage time over zero-state (default) probability is obtained, linking the related Fokker-Planck equation to a well-known result for the square Bessel processes. After computing the present value of the protection payment due to a default event, a CDS contract is valued. The increase in both the probability of default and the coupon rates under scaled diffusion compared to the standard Brownian can improve the lower empirical performance of the standard Constant Elasticity of Variance model, leading to a more realistic model for credit events. |