Research On The Swap Derivatives Pricing And Markets Linkages Effect

Swap is a transaction between parties required to have a mutual exchange of cash flows. The first swap began in 1981, after that the volume of relative swap and its derivatives in the international derivatives market is enlarge, in this paper, we focus on study Credit Default Swaps (CDS), Basket Credit Default Swaps (BDS), Interest Rate Swaps (IRS) and Swaption based on underlying interest rate swaps. According to the statistics of Bank for International Settlements, swaps and LIBOR-based derivatives market has become the world's largest fixed income market, but the 2008-2009 global financial crisis arising from the US made derivatives markets the international financial system seriously affected, and quickly spread to other financial markets, including China. The financial crisis warn us that on one hand, the derivatives innovation need to consider the effect of risk on pricing and lifting the accuracy of the model; On the other hand, for the contagious of global financial crisis and global markets integration, an influential national abnormal situation of financial markets can quickly spread to other countries, so the linkages effect of financial markets during the crisis are also vital.Based on the above two reasons, we first consider the pricing model of CDS, BDS and Swaption, respectively; Second, we analyze the linkages effect of RMB interest rate swap market the US market and domestic monetary policy arisng from the civil development of IRS market. This article would show the research in the following four aspects, relevant results are summarized below:(1)The nonlinear looping default intensity model is given and the pricing model of CDS with counterparty risk is studied.The existed work did not deal with the default correlated risk completely. The intensity model used for CDS pricing in existence researches did not show non-linear change of default intensity and correlation with market risk factors. In this paper, nonlinear looping default intensity model is constructed, which is used in the valuation of CDS. The results compared with the existence work show that the seller of CDS contained more default risk.(2)Based on distorted Copula, the default premium leg of BDS and its sensitivity analysis of default premium leg respect to hazard rate with disturbed factor are considered.The normal Copula function could not describe the tail correlation well in BDS pricing is the main problem in calculated the joint cumulative probability distribution of assets group. Using Monte Carlo simulation, we reveal that two kinds of distorted Copula could describe the tail correlation much better than Gaussian Copula. So we use this distorted Copula in the valuation model of BDS, and show the sensitivity analysis respect to hazard rate with disturbance factor to analysis the effect of default risk on default premium leg of BDS.(3)Based on diffusion-like process multi-factors time varying Markov chain is suggested, and the valuation of swaption with counterparty credit rating is studied.The existed research did not consider the counterparty risk and could not ontain closed form solution for swaption. The main results in this paper are:First, the model with common and rating specific factors as diffusion-like process are introduced. Kalman filter and constrained nonlinear least square are applied to estimate the models. Second, the valuation model of swaption with counterparty risk is introduced and the closed form solution is also obtained. Finally, we show the impact of credit status of counterparty on the valuation of swaption.(4)The linkages effect of the US-China markets and the RMB interest rate swaps market with domestic monetary policy are empirical analyzed based on cross wavelet methods, respectively.As the Cross wavelet methods can overcome limitations of multiple econometric methodology in frequency field space. On one hand, the linkages effect between China-US interest rate swap markets during the financial crisis are studied by Wavelet coherency and phase difference analysis between the two markets are studied. Furthermore, the integration of China-US interest rate swap markets is investigated. On the other hand, we empirial analysis the linkages between grown rate of money supply M1, M2 and trading volume of interest rate swaps to show the linkages effect of domestic monetary policy and RMB interest rate swaps market based the cross wavelet analysis.The entire research routine and frame are:based on relative research and problem arising from financial crisis, swap derivatives and markets linkages effect are studied furthermore. First of all, nonlinear looping default intensity and distorted Copula are used for pricing CDS and BDS, respectively; Secondly, the valuation of swaption model with credit rating of counterparty are suggested; Third, cross-wavelet methods in time-frequency space are used to examine the linkages effect between China and US interest rate swap markets. Finally, the linkages effect of domestic monetary policy and RMB interest rate swaps are studied based cross-wavelet methods in time-frequency space.We hope that the conclusion of this paper would be helpful for development and monitor of the Chinese RMB interest rate swap market and swap derivatives innovation.