Abstract
OTC credit derivatives are nonstandardized financial derivatives which have the following characteristics. (1) Information on trades is not public. (2) There is no performance guarantee from the stock exchange. (3) The bigger the risk in performance, the bigger the price floating. These result in an asymmetry of market information flow and this asymmetry acts as a decisive factor in the credit risk pricing of financial instruments. The asymmetry of market information flows will lead to obvious fuzziness in how counterparty risks are characterized, as in the process of valuing assets when discontinuous jumping takes place. Accurately measuring the amplitude and frequency of asset values when influenced by information asymmetry cannot be arrived at just by analyzing the random values of historical data. With this in mind, this paper hypothesizes both asset value jump amplitude and frequency of random parameters as a triangular fuzzy interval, i.e., a new double exponential jump diffusion model with fuzzy analysis. It then gives a credit default swap pricing formula in the form of fuzziness. Through the introduction of fuzzy information, this model has the advantage of being able to arrive at results in the form of triangular fuzziness and, consequently, being able to solve some inherent problems in a world characterized by asymmetry in the flow of market information and, to a certain extent, the inadequate disclosure of information.
Highlights
Information disclosure bridges the asymmetry of information between issuers and investors as disclosure can reduce information asymmetry
(3) The bigger the risk in performance, the bigger the price floating. These result in an asymmetry of market information flow and this asymmetry acts as a decisive factor in the credit risk pricing of financial instruments
Through the introduction of fuzzy information, this model has the advantage of being able to arrive at results in the form of triangular fuzziness and, being able to solve some inherent problems in a world characterized by asymmetry in the flow of market information and, to a certain extent, the inadequate disclosure of information
Summary
Information disclosure bridges the asymmetry of information between issuers and investors as disclosure can reduce information asymmetry. The combining of fuzziness and randomness under conditions of asymmetric information can lead to more efficient tools that are used to strip, transfer, and hedge credit risk pricing and so build a much closer model of the real credit derivatives market. Inspired by [6, 7], this paper combined fuzziness and randomness to look at the credit default swap pricing problem in fuzzy random environments by using a pricing structural model. The fuzzy credit default swap pricing model can be achieved by using the structural model to calculate the probability of asset default The advantage of this model is to be able to show the results in a triangular fuzziness form through the introduction of fuzzy information. This solves some inherent problems as to the flow of information in an asymmetric market and, to a certain extent, the inadequate disclosure of information
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