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CDS index options in Markov chain models


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Title: CDS index options in Markov chain models
Authors: Herbertsson, Alexander
Issue Date: 7-Jan-2019
Extent: 48
Publication type: report
Publisher: University of Gothenburg
Organization: Dept. of Economics, University of Gothenburg
Series/Report no.: Working Papers in Economics
748
Keywords: Credit risk
CDS index
CDS index options
intensity-based models
dependence modelling
markov chains
matrix-analytical methods
numerical methods
Abstract: We study CDS index options in a credit risk model where the defaults times have intensities which are driven by a finite-state Markov chain representing the underlying economy. In this setting we derive compact computationally tractable formulas for the CDS index spread and the price of a CDS index option. In particular, the evaluation of the CDS index option is handled by translating the Cox-framework into a bivariate Markov chain. Due to the potentially very large, but extremely sparse matrice... more
ISSN: 1403-2465
Description: JEL Classification: G33; G13; C02; C63; G32.
URI: http://hdl.handle.net/2077/58590
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