CDS calibration under an extended JDCEV model, version 8 May 2017

Marco Di Francesco, Sidy Diop, Andrea Pascucci: We propose a new methodology for the calibration of a hybrid credit-equity model to CDS spreads and survival probabilities. We consider an extended Jump to Default Constant Elasticity of Variance model incorporating stochastic and possibly negative interest rates. Our approach is based on a perturbation technique that provides an explicit asymptotic expansion of the CDS spreads. The robustness and efficiency of the method is confirmed by several calibration tests on real market data.