Credit default swap pricing using artificial neural networks

The credit derivatives market has experienced unprecedented growth over the past few years. As such, there is a growing interest in tools for pricing the most prominent credit derivative, the credit default swap. In this paper, we present several artificial neural networks that predict real-world credit default swap prices. In addition to the input parameters used by analytical pricing strategies, these networks explore the use of historic credit default swap prices and equity prices. It was found that the inclusion of historic parameters has increased the accuracy of the network's prediction of credit default swap prices‥

[1]  Alessandro Ludovici.  The Application of Neural Networks to the Pricing of Credit Derivatives , 2006 .

[2]  Michael Negnevitsky,et al.  Artificial Intelligence: A Guide to Intelligent Systems , 2001 .

[3]  P. Collin‐Dufresne,et al.  Do Credit Spreads Reflect Stationary Leverage Ratios , 2001 .

[4]  L. Martellini,et al.  EXPLORING FOR THE DETERMINANTS OF CREDIT RISK IN CREDIT DEFAULT SWAP TRANSACTION DATA : IS FIXED-INCOME MARKETS ’ INFORMATION SUFFICIENT TO EVALUATE CREDIT RISK ? , 2002 .

[5]  N. Prabhala,et al.  The relation between implied and realized volatility , 1998 .

[6]  J. Pakarinen.  The Relationship Between Implied and Realized Volatility , 2007 .

[7]  Linda Salchenberger,et al.  Using neural networks to forecast the S & P 100 implied volatility , 1996, Neurocomputing.

[8]  J. M. Tavakoli.  Credit derivatives & synthetic structures : a guide to instruments and applications , 2001 .

[9]  Alan G. White,et al.  The Valuation of Credit Default Swap Options , 2003 .

[10]  Didier Cossin,et al.  Exploring for the Determinants of Credit Risk in Credit Default Swap Transaction Data: Is Fixed-Income Markets' Information Sufficient to Evaluate Credit Risk? , 2002 .

[11]  Max Bruche,et al.  Recovery rates , default probabilities , and the credit cycle , 2006 .

[12]  Rajna Gibson,et al.  Model Risk for European-Style Stock Index Options , 2007, IEEE Transactions on Neural Networks.

[13]  Paul Lajbcygier,et al.  Improving option pricing with the product constrained hybrid neural network , 2004, IEEE Transactions on Neural Networks.

[14]  Nikola Gradojevic,et al.  Option Pricing With Modular Neural Networks , 2009, IEEE Transactions on Neural Networks.