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In Rememberance: World Trade Center (WTC)

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Break on Through to the Single Side

by Dilip Madan of the University of Maryland, and
Wim Schoutens of Katholieke Universiteit Leuven

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.

JEL Classification: G10, G12, G13.

Keywords: Default Probabilities, Levy Models, CDS pricing.

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