Weak Convergence of Path-Dependent SDEs in Basket CDS Pricing with Contagion Risk
Abstract
We investigate the computational aspects of the basket CDS pricing with counterparty risk under a credit contagion model of multinames. This model enables us to capture the systematic volatility increases in the market triggered by a particular bankruptcy. The drawback of this problem is its analytical complication due to its path-dependent functional, which bears a potential failure in its convergence of numerical approximation under standing assumptions. In this paper we find sufficient conditions for the desired convergence of the functionals associated with a class of path-dependent stochastic differential equations. The main ingredient is to identify the weak convergence of the approximated solution to the underlying path-dependent stochastic differential equation.
Keywords
Cite
@article{arxiv.1506.00082,
title = {Weak Convergence of Path-Dependent SDEs in Basket CDS Pricing with Contagion Risk},
author = {Yao Tung Huang and Qingshuo Song and Harry Zheng},
journal= {arXiv preprint arXiv:1506.00082},
year = {2016}
}