The Simulation Analysis Of Credit Default Swap Pricing Based On The KMV-Copula Model

The scale of credit bonds has been continuously expanding and the balance of non-performing loans has been increasing in recent years.The default of credit bonds has hit a record high in 2018.The credit risk of the financial market is on the rise in China.Credit default swaps can separate credit risk from market risk,so that credit risk can be hedged in the market and provide an effective means for credit risk management.However,the product was born relatively late and the pricing mechanism was not yet mature in the Chinese market.Therefore,this paper uses multiple reference entities as research objects to simulate and analyze its pricing.Firstly,this paper constructs a pricing model based on KMV and Copula functions.When using KMV to construct the marginal distribution of default,the volatility estimation of equity value is particularly important.This paper uses GARCH model to fit the stock price volatility.When using Copula function to construct the joint distribution of default,this paper introduces the Vine-Copula function to describe the default-related structure between reference entities.And use the Monte Carlo method to simulate the default time.Secondly,this paper analyzes the development of credit default swaps in market of the US,and draws on the development experience.Then this paper illustrates the need to carry out this business in China combined with the development of non-performing loans,credit bond market,stock market and real estate market.This paper also introduces the centralized liquidation and one by one liquidation of credit default swaps in China.Finally,the entities in the list of reference entities published by Shanghai Clearing House are selected to simulate the pricing.In this paper,the effects of default intensity estimated by KMV model on credit spreads are analyzed under the default correlation structure constructed by specific entities.It is found that with the increase of the intensity of default,the spread of the first default and the second default of credit default swaps is basically stable and the fluctuation is not large,while the spread of the third credit default swaps is fluctuating.Finally,this paper draws on the development experience of the United States market and puts forward some suggestions for the development of the credit default swap business in China.