Abstract
A hyperbolic function is introduced to reflect the attenuation effect of one firm’s default to its partner. If two firms are competitors (copartners), the default intensity of one firm will decrease (increase) abruptly when the other firm defaults. As time goes on, the impact will decrease gradually until extinct. In this model, the joint distribution and marginal distributions of default times are derived by employing the change of measure, and the fair swap premium of a credit default swap (CDS) can be valued.
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Project supported by the National Basic Research Program of China (973 Program) (No. 2007CB814903) and the National Natural Science Foundation of China (No. 70671069)
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Bai, Yf., Hu, Xh. & Ye, Zx. A model for dependent default with hyperbolic attenuation effect and valuation of credit default swap. Appl. Math. Mech.-Engl. Ed. 28, 1643–1649 (2007). https://doi.org/10.1007/s10483-007-1211-9
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DOI: https://doi.org/10.1007/s10483-007-1211-9