{"title":"FROM BID-ASK CREDIT DEFAULT SWAP QUOTES TO RISK-NEUTRAL DEFAULT PROBABILITIES USING DISTORTED EXPECTATIONS","authors":"Matteo Michielon, A. Khedher, P. Spreij","doi":"10.1142/S0219024921500175","DOIUrl":null,"url":null,"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.","PeriodicalId":47022,"journal":{"name":"International Journal of Theoretical and Applied Finance","volume":null,"pages":null},"PeriodicalIF":0.5000,"publicationDate":"2021-04-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"3","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"International Journal of Theoretical and Applied Finance","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.1142/S0219024921500175","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q4","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
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.
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.
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