'Extended black' sovereign credit default swap pricing model

Marco Realdon, Cheng Qin Shi

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This article presents and tests an 'Extended Black' sovereign Credit Default Swap (CDS) pricing model, whereby the default intensity is driven by truncated Gaussian latent factors. CDS pricing requires numerical solutions through finite differences, yet maximum likelihood estimation is still feasible. Empirical evidence from sovereign CDS rates supports the Extended Black model. The addition of a second truncated Gaussian latent factor driving the default intensity significantly improves performance.

Original languageEnglish
Pages (from-to)1133-1137
Number of pages5
JournalApplied Economics Letters
Issue number12
Publication statusPublished - Aug 2010

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