Longstaff et al 2005 - pricing CDS

RedSniper · June 25th, 2008, 7:20 pm

Hi there:Who has studied 'Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit-Default Swap Market', by Longstaff, Mithal and Neis, JOF 2005? The working paper is here: Longstaff et al.Please explain the lambda in formula (8) and (9). I cannot figure out how to model this.*** Thank you ***

RedSniper · July 8th, 2008, 7:47 pm

The appendix to this paper claims an easy solution to the following ODE'sB' = 1/2 sigma^2 B^2 - beta B - 1A' = alpha A BI cannot replicate the outcome. Using Mathematica I get different results.Who can give a clue to this solution. The first equation is a Riccati equation.KR