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CDS INDEX OPTIONS UNDER INCOMPLETE INFORMATION


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Title: CDS INDEX OPTIONS UNDER INCOMPLETE INFORMATION
Authors: Herbertsson, Alexander
Frey, Rüdiger
Issue Date: Dec-2016
Extent: 43
Publication type: report
Organization: Dept. of Economics, University of Gothenburg
Series/Report no.: Working Papers in Economics
685
Keywords: Credit risk
CDS index
CDS index options
intensity-based models
dependence modelling
incomplete information
nonlinear filtering
numerical methods
Abstract: We derive practical formulas for CDS index spreads in a credit risk model under incomplete information. The factor process driving the default intensities is not directly observable, and the filtering model of Frey & Schmidt (2012) is used as our setup. In this framework we find a computationally tractable expressions for the payoff of a CDS index option which naturally includes the so-called armageddon correction. A lower bound for the price of the CDS index option is derived and we provide exp... more
ISSN: 1403-2465
Description: JEL: G33; G13; C02; C63; G32.
URI: http://hdl.handle.net/2077/50947
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