'Extended black' sovereign credit default swap pricing model

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JournalApplied Economics Letters
DatePublished - Aug 2010
Issue number12
Volume17
Number of pages5
Pages (from-to)1133-1137
Original languageEnglish

Abstract

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.

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