Document Type thesis Author Name Diallo, Nafi C URN etd-011106-122357 Title The Valuation of Credit Default Swaps Degree MS Department Mathematical Sciences Advisors Luis J Roman, Advisor Keywords Credit Default Swap Hazard rate approach Merton model Credit Risk Date of Presentation/Defense 2005-12-17 Availability unrestricted
The credit derivatives market has known an incredible development since its advent in the 1990’s. Today there is a plethora of credit derivatives going from the simplest ones, credit default swaps (CDS), to more complex ones such as synthetic single-tranche collateralized debt obligations. Valuing this rich panel of products involves modeling credit risk. For this purpose, two main approaches have been explored and proposed since 1976. The first approach is the Structural approach, first proposed by Merton in 1976, following the work of Black-Scholes for pricing stock options. This approach relies in the capital structure of a firm to model its probability of default. The other approach is called the Reduced-form approach or the hazard rate approach. It is pioneered by Duffie, Lando, Jarrow among others. The main thesis in this approach is that default should be modeled as a jump process.
The objective of this work is to value Asset-backed Credit default swaps using the hazard rate approach.
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