Enhancing credit default swap valuation with meshfree methods |
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Authors: | Alexander Guarin Xiaoquan Liu Wing Lon Ng |
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Institution: | a Centre for Computational Finance and Economic Agents, University of Essex, Colchester CO4 3SQ, UK b Banco de la República, Carrera 7 No. 14-78, Bogotá, Colombia c Essex Business School, University of Essex, Colchester CO4 3SQ, UK |
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Abstract: | In this paper, we apply the meshfree radial basis function (RBF) interpolation to numerically approximate zero-coupon bond prices and survival probabilities in order to price credit default swap (CDS) contracts. We assume that the interest rate follows a Cox-Ingersoll-Ross process while the default intensity is described by the Exponential-Vasicek model. Several numerical experiments are conducted to evaluate the approximations by the RBF interpolation for one- and two-factor models. The results are compared with those estimated by the finite difference method (FDM). We find that the RBF interpolation achieves more accurate and computationally efficient results than the FDM. Our results also suggest that the correlation between factors does not have a significant impact on CDS spreads. |
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Keywords: | Radial basis function interpolation Finite difference methods Default intensity |
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