Pricing Equity Default Swaps under an approximation to the CGMY L\'{e}% vy Model
Pricing of Securities
2008-12-02 v1 Probability
Abstract
The Wiener-Hopf factorization is obtained in closed form for a phase type approximation to the CGMY L\'{e}vy process. This allows, for the approximation, exact computation of first passage times to barrier levels via Laplace transform inversion. Calibration of the CGMY model to market option prices defines the risk neutral process for which we infer the first passage times of stock prices to 30% of the price level at contract initiation. These distributions are then used in pricing 50% recovery rate equity default swap (EDS) contracts and the resulting prices are compared with the prices of credit default swaps (CDS). An illustrative analysis is presented for these contracts on Ford and GM.
Cite
@article{arxiv.0711.2807,
title = {Pricing Equity Default Swaps under an approximation to the CGMY L\'{e}% vy Model},
author = {Soeren Asmussen and Dilip Madan and Martijn Pistorius},
journal= {arXiv preprint arXiv:0711.2807},
year = {2008}
}
Comments
Accepted for publication in J. Comp. Finance