Simulation for risk management: a simulation-based credit default swap pricing approach under jump-diffusion

  • Authors:

  • Tarja Joro;Paul Na

  • Affiliations:

  • University of Alberta School of Business, Alberta, Canada;Bayerische Landesbank New York Branch, New York, NY

  • Venue:
  • Proceedings of the 35th conference on Winter simulation: driving innovation
  • Year:
  • 2003

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Abstract

Diffusion-based Credit Default Swap (CDS) pricing models produce zero spreads for very short-term contracts, which contradict empirical data. We introduce a simulation-based CDS pricing approach that avoids the zero short-term spreads problem through a jump-diffusion process.