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Valuation of Loan CDS Under Intensity Based Model

by Zhen Wei of Stanford University

May 2, 2007

Abstract: The loan CDS (LCDS) contract is almost identical to a standard unsecured CDS contract, except for two items. First, the reference obligation is different. Second, the LCDS contract is canceled if there is not a reference obligation available, where a CDS contract remains outstanding. This paper develops a general intensity based model for the pricing and trading of LCDS contract. Solutions can be obtained under Affine Jump Diffusion specifications through a set of Riccati equations and explicit formula are derived under the CIR parameterization.

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