caa a22 4500 445363150 CHVBK 20180317142921.0 cr unu---uuuuu 170323e20110901xx s 000 0 eng 10.1007/s00780-010-0139-3 doi (NATIONALLICENCE)springer-10.1007/s00780-010-0139-3 Pricing equity default swaps under the jump-to-default extended CEV model [Elektronische Daten] [Rafael Mendoza-Arriaga, Vadim Linetsky] Equity default swaps (EDS) are hybrid credit-equity products that provide a bridge from credit default swaps (CDS) to equity derivatives with barriers. This paper develops an analytical solution to the EDS pricing problem under the jump-to-default extended constant elasticity of variance model (JDCEV) of Carr and Linetsky. Mathematically, we obtain an analytical solution to the first passage time problem for the JDCEV diffusion process with killing. In particular, we obtain analytical results for the present values of the protection payoff at the triggering event, periodic premium payments up to the triggering event, and the interest accrued from the previous periodic premium payment up to the triggering event, and we determine arbitrage-free equity default swap rates and compare them with CDS rates. Generally, the EDS rate is strictly greater than the corresponding CDS rate. However, when the triggering barrier is set to be a low percentage of the initial stock price and the volatility of the underlying firm's stock price is moderate, the EDS and CDS rates are quite close. Given the current movement to list CDS contracts on organized derivatives exchanges to alleviate the problems with the counterparty risk and the opacity of over-the-counter CDS trading, we argue that EDS contracts with low triggering barriers may prove to be an interesting alternative to CDS contracts, offering some advantages due to the unambiguity, and transparency of the triggering event based on the observable stock price. Springer-Verlag, 2010 Default nationallicence Credit default swaps nationallicence Equity default swaps nationallicence Credit spread nationallicence Corporate bonds nationallicence Equity derivatives nationallicence Credit derivatives nationallicence CEV model nationallicence Jump-to-default extended CEV model nationallicence Mendoza-Arriaga Rafael Information, Risk, & Operations Management Dept. (IROM), McCombs School of Business, The University of Texas at Austin, 1 University Station, CBA 5.202, B6500, 78712, Austin, TX, USA aut Linetsky Vadim Department of Industrial Engineering and Management Sciences, McCormick School of Engineering and Applied Sciences, Northwestern University, 2145 Sheridan Road, 60208, Evanston, IL, USA aut Finance and Stochastics Springer-Verlag 15/3(2011-09-01), 513-540 0949-2984 15:3<513 2011 15 780 https://doi.org/10.1007/s00780-010-0139-3 text/html Onlinezugriff via DOI 1 research-article jats NATIONALLICENCE 856 40 https://doi.org/10.1007/s00780-010-0139-3 text/html Onlinezugriff via DOI NATIONALLICENCE 700 1- Mendoza-Arriaga Rafael Information, Risk, & Operations Management Dept. (IROM), McCombs School of Business, The University of Texas at Austin, 1 University Station, CBA 5.202, B6500, 78712, Austin, TX, USA aut NATIONALLICENCE 700 1- Linetsky Vadim Department of Industrial Engineering and Management Sciences, McCormick School of Engineering and Applied Sciences, Northwestern University, 2145 Sheridan Road, 60208, Evanston, IL, USA aut NATIONALLICENCE 773 0- Finance and Stochastics Springer-Verlag 15/3(2011-09-01), 513-540 0949-2984 15:3<513 2011 15 780 Metadata rights reserved Springer special CC-BY-NC licence nationallicence BK010053 XK010053 XK010000 NATIONALLICENCE NATIONALLICENCE NL-springer