FROM BID-ASK CREDIT DEFAULT SWAP QUOTES TO RISK-NEUTRAL DEFAULT PROBABILITIES USING DISTORTED EXPECTATIONS

IF 0.5 Q4 BUSINESS, FINANCE

International Journal of Theoretical and Applied Finance Pub Date : 2021-04-27 DOI:10.1142/S0219024921500175

Matteo Michielon, A. Khedher, P. Spreij

引用次数: 3

Abstract

Risk-neutral default probabilities can be implied from credit default swap (CDS) market quotes. In practice, mid-CDS quotes are used as inputs, as their risk-neutral counterparts are not observable. We show how to imply risk-neutral default probabilities from bid and ask quotes directly by means of formulating the CDS calibration problem to bid and ask market quotes within the conic finance framework. Assuming the risk-neutral distribution of the default time to be driven by a Poisson process we prove, under mild liquidity-related assumptions, that the calibration problem admits a unique solution that also allows to jointly calculate the implied liquidity of the market.

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从投标即信用违约掉期报价到使用扭曲预期的风险中性违约概率

风险中性违约概率可以从信用违约互换(CDS)市场报价中隐含出来。在实践中，cds中期报价被用作输入，因为它们的风险中性对应是不可观察的。我们展示了如何通过在经济金融框架内制定CDS校准问题来投标和询价市场报价，直接从投标和询价报价中隐含风险中性违约概率。假设违约时间的风险中性分布由泊松过程驱动，我们证明，在温和的流动性相关假设下，校准问题承认一个唯一的解决方案，也允许共同计算市场的隐含流动性。

本文章由计算机程序翻译，如有差异，请以英文原文为准。

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来源期刊

International Journal of Theoretical and Applied Finance BUSINESS, FINANCE-

CiteScore

1.10

自引率

20.00%

发文量

期刊介绍： The shift of the financial market towards the general use of advanced mathematical methods has led to the introduction of state-of-the-art quantitative tools into the world of finance. The International Journal of Theoretical and Applied Finance (IJTAF) brings together international experts involved in the mathematical modelling of financial instruments as well as the application of these models to global financial markets. The development of complex financial products has led to new challenges to the regulatory bodies. Financial instruments that have been designed to serve the needs of the mature capitals market need to be adapted for application in the emerging markets.