Credit derivative valuation and parameter estimation for CIR and Vasicek-type models.
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Date
2013
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Abstract
A credit default swap is a contract that ensures protection against losses occurring due to a
default event of an certain entity. It is crucial to know how default should be modelled for
valuation or estimating of credit derivatives. In this dissertation, we first review the structural
approach for modelling credit risk. The model is an approach for assessing the credit risk of
a firm by typifying the firms equity as a European call option on its assets, with the strike
price (or exercise price) being the promised debt repayment at the maturity. The model can
be used to determine the probability that the firm will default (default probability) and the
Credit Spread.
We second concentrate on the valuation of credit derivatives, in particular the Credit Default
Swap (CDS) when the hazard rate (or even of default) is modelled as the Vasicek-type model.
The other objective is, by using South African credit spread data on defaultable bonds to
estimate parameters on CIR and Vasicek-type Hazard rate models such as stochastic differential
equation models of term structure. The parameters are estimated numerically by the Moment
Method.
Description
Thesis (M.Sc.)-University of KwaZulu-Natal, Durban, 2013.
Keywords
Derivative securities--South Africa., Credit derivatives--South Africa., Collateralized debt obligations., Bonds--South Africa., Moment problems (Mathematics), Credit--South Africa., Theses--Applied mathematics.