Weak Convergence of Path-Dependent SDEs in Basket Credit Default Swap Pricing with Contagion Risk
File(s)
Published version
Accepted version
Author(s)
Huang, Yao Tung
Song, Qingshuo
Zheng, Harry
Type
Journal Article
Abstract
We investigate computational aspects of basket credit default swap pricing with counterparty credit risk under a multiname contagion model. This model enables us to capture systematic volatility increases in the market triggered by particular bankruptcies. A drawback of this model is its analytical intractability due to a combination of path-dependent coefficients and a path-dependent functional, which furthermore causes potential failure of convergence of numerical approximations under standing assumptions. In this paper, we find sufficient conditions for the desired convergence of functionals associated with approximated solution of certain path-dependent stochastic differential equations.
Date Issued
2017-01-05
Date Acceptance
2016-10-24
Citation
SIAM Journal on Financial Mathematics, 2017, 8 (1), pp.1-27
ISSN
1945-497X
Publisher
Society for Industrial and Applied Mathematics
Start Page
1
End Page
27
Journal / Book Title
SIAM Journal on Financial Mathematics
Volume
8
Issue
1
Copyright Statement
© 2017 Society for Industrial and Applied Mathematics
Subjects
Social Sciences
Science & Technology
Physical Sciences
Business, Finance
Mathematics, Interdisciplinary Applications
Social Sciences, Mathematical Methods
Business & Economics
Mathematics
Mathematical Methods In Social Sciences
path-dependent SDE
weak convergence
correlated first-passage times
basket CDS
contagion risk
counterparty risk
STOCHASTIC DIFFERENTIAL-EQUATIONS
BROWNIAN-MOTION
COEFFICIENTS
Publication Status
Published