A Study On Pricing Method Of Basket Credit Default Swaps

Under the background of the rapid development in the international credit derivatives market and the urgently practical demand with Chinese banks, it becomes a hot spot of current theoretical and empirical studies to exploit credit derivatives and design a reasonable deposit credit derivatives price. Although the market capacity of the international credit derivatives market is less than before because of the current Subprime Lending Crisis in US, after deep analysis it is found that there is no relationship of credit derivatives and reduction of market capacity. The real reason is the overlooking of American Financial Supervision Authority in potential risk of Subprime Lending. As long as information disclosure and financial supervise are strengthened, the credit derivatives will be the effective tool for the problem of credit concentration risk and non-performing loans for Chinese banks.Single Credit Default Swaps (CDS) is the most important form of credit derivatives. Basket Credit Default Swaps (BCDS) is the extension of CDS. It packs several reference assets from different credit rating, and concludes the contrat with the object of reference portfolio. The advantages of the BCDS are cost reduction of concluding contrat and smooth transfer of the credit risk. This dissertation systemically discusses the pricing problem of BCDS. The core and achievements of this dissertation can be generalized as follows:Firstly, under situation of the constant default intensity, this dissertation develops a method of calculating the fair credit spread of BCDS based on CreditRisk+ model with dynamic characteristic, and the analytical expression for the fair credit spread of BCDS is also given out. In this dissertation though a numerical example, the calculation method for parameters of CreditRisk+ model with dynamic characteristic is studied and the calculation procedures of fair credit spread is also established. The result of the numerical example shows the effectiveness of the new model.Secondly, under the situation that the default intensities are diffusion process, this dissertation exploit a method of calculating the fair credit spread of BCDS based on partial differential equation (PDE), and the analytical expression for the fair credit spread of BCDS is also given out. In this dissertation though a numerical example, the calculation procedures of fair credit spread is established. The result of the numerical example shows equivalence of CreditRisk+ model and PDE method, as long as the parameters of two models are equivalence.Finanly, this dissertation establishes the correlation of default time based on the Copula function, and though this processes the Copula function is used in the pricing study of BCDS. In this dissertation the multivariate Copula is used to analyze the asymmetric dependence structure among financial asset returns, whose marginal processes are captured by nonparametric kernel density estimation, and parameters of Copula function are estimated by maximum likelihood estimation. This dissertation also introduces the simulation technology of the multivariate Copula. The result of the numerical example shows that compared with normal Copula and t-Copula, Clayton Copula gives the bigger probability of the first default time of BCDS, so it means a conservative price is given out based on the Clayton Copula.The research is sponsored by the National Natural Science Foundation of China (Grant No. 70576076) and Research Foundation of the Doctoral Program of Higher Education (Grant No. 20050056057)...