Break on Through to the Single Side
July 26, 2007
Abstract: We employ a Levy process subject only to negative jumps to describe the motion of asset values. This specification permits fast computation of first passage probabilities. As a result we are able to calibrate all CDS curves for the 125 ITRAXX underliers weekly and develop a time series for the implied parameter values. A variety of models are investigated for the process, gamma, inverse gaussian, and the one sided CGMY here referred to as CMY.
Keywords: Default Probabilities, Levy Models, CDS pricing.