calibrate.BlackCox: Black and Cox model calibration to market CDS data

In CreditRisk: Evaluation of Credit Risk with Structural and Reduced Form Models

Description

Compares CDS rates quoted on the market with theoric CDS rates calculeted by the function cds and looks for the parameters to be used into BlackCox for returning the default intensities corresponding to real market CDS rates performing the minimization of the objective function.

Usage

calibrate.BlackCox(V0, cdsrate, r, t, ...)

Arguments

V0	firm value at time t = 0.
cdsrate	CDS rates from the market.
r	risk-free rate.
t	a vector of debt maturity structure.
...	additional parameters used in cds function.

Details

Inside calibrate.BlackCox, the function objfn takes the input a vector of parameters and returns the mean error occurred estimating CDS rates with cds function. The inputs used in cds are the default intensities calculated by the BlackCox function with the calibrated parameters. In particular the error is calculated as:

\frac{1}{n}∑_{i=1}^n (c^{ds}-c^{ds}_{mkt})^2.

This quantity is a function of the default intensities and it is the objective function to be minimized in order to take optimal solutions for intensities.

Value

calibrate.BlackCox returns an object of class data.frame with calculated parameters of the BlackCox model and the error occurred in the minimization procedure.

References

Damiano Brigo, Massimo Morini, Andrea Pallavicini (2013) Counterparty Credit Risk, Collateral and Funding. With Pricing Cases for All Asset Classes

Examples

calibrate.BlackCox(V0 = 1, cdsrate = cdsdata$Par.spread, r = 0.005, t = cdsdata$Maturity)

CreditRisk documentation built on May 1, 2019, 9:38 p.m.