Credit Default Swaps and the mixed-fractional CEV model

Araneda, Axel A.

Keywords: cds, CEV model, Credit Default Swaps, Default Probability


This paper explores the capabilities of the Constant Elasticity of Variance model driven by a mixed-fractional Brownian motion (mfCEV) to address default-related financial problems, particularly the pricing of Credit Default Swaps (CDS). The first-passage time over zero-state (default) probability is obtained, linking the related Fokker-Planck equation to a well-known result for the square Bessel processes. After computing the present value of the protection payment due to a default event, a CDS contract is valued. The increase in both the probability of default and the coupon rates under mixed-fractional diffusion compared to the standard Brownian case improves the lower empirical performance of the standard Constant Elasticity of Variance model, leading to a more realistic model for credit events.

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Fecha de publicación: 2023
Año de Inicio/Término: June 14th to 16th 2023