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, Tj, cdsrate, ...)
Value
returns an object of class list with calculated intensities and the
error occurred in the minimization procedure.
Arguments
r
interest rates.
t
premiums timetable.
Tj
CDS maturities.
cdsrate
CDS rates from market.
...
additional parameters used in cds function.
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