calibrate.cds: Calibrate the default intensities to market CDS data

Description

Compares CDS rates quoted on market with theoric CDS rates and looks for default intensities that correspond to real market CDS rates trough a minimization problem of an objective function.

Usage

calibrate.cds(r, t, T, cdsrate, ...)

Arguments

interest rates.

premiums timetable.

CDS maturities.

cdsrate

CDS rates from market.

...

additional parameters used in cds function.

Value

returns an object of class list with calculated intensities and the error occurred in the minimization procedure.

Details

Inside calibrate.cds, the function err.cds takes the input a vector of intensities and return the mean error occurred estimating CDS rates with cds. In particular such error is calculated as: $$\frac{1}{n}\sum_{i=1}^n (c^{ds}-c^{ds}_{mkt})^2.$$ This quantity is a function of default intensities and is the our objective function to be minimized in order to take optimal solutions for intensities.

References

David Lando (2004) Credit risk modeling

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

Examples

Run this code

# NOT RUN {
calibrate.cds( r = cdsdata$ED.Zero.Curve, t = seq(.5, 30, by = 0.5),
               T = c(1, 2, 3, 4, 5, 7, 10, 20, 30), cdsrate = cdsdata$Par.spread, RR = 0.4)

# }

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