Journal of Credit Risk

Risk.net

A survey of loan credit default swap pricing models

Michael Ong, Dan Li and David Lu

ABSTRACT

The loan credit default swap (LCDS) was originally designed as an alternative to the traditional credit default swap (CDS) due to its effectiveness in hedging the underlying loans. However, there do not appear to be standard acceptable modeling approaches in the market. In this paper, we review several prevailing LCDS pricing approaches as well as some nonstandard modeling methods. We make extensive comparisons and experiments (including testing the consistency between the CDS and LCDS markets) and discuss the potential uses and limitations of each approach.

 

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