Research On CDS Pricing Model Based On Vasicek Process

Credit default swap(CDS)is a kind of credit risk mitigation financial instrument,so that credit risk can be priced and traded in the market.CDS products have developed rapidly since their appearance in the 1990 s.At present,the domestic CDS market is still in its infancy,and there is a problem of pricing difficulty.By building a reduced credit risk model,the factors affecting default can be better reflected through the default intensity.In this paper,three default intensity models are constructed by using the reduction method,and the analytical formulas of CDS pricing are derived respectively according to the principle of arbitrage-free pricing.In this paper,two reference entities are taken as examples,Markov chain is used to represent the switch of different economic states,the default process of reference entity is regarded as Cox process,and two-dimensional circular default risk contagion structure is used to describe the impact of default of other reference entities on the default of reference entity.Based on this,we construct three default intensity models and present the recursive relation for the description of the intensity process: 1.Vasicek process was used to describe the changing process of default intensity.2.Mechanism transformation is added to reflect the influence of macroeconomic state on default intensity;3.Add Poisson jump to describe the sudden increase of default intensity caused by sudden credit events.According to the default intensity model constructed,we obtained the joint distribution of default time by the measure transformation method,and carried out Laplace transformation on the related structures with the default intensity process to obtain the analytical formula of the first two default pricing of CDS products including two reference entities,and finally analyzed the relationship between parameters and pricing.