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Pricing Model of Credit Default Swap Based on Jump-Diffusion Process and Volatility with Markov Regime Shift

By introducing the Jump-Diffusion Process and Markov Regime Shift, the paper explores Monte Carlo simulation to examine the pricing problem of single name Credit Default Swaps (CDS), which the price of CDS is affected by both unpredictable idiosyncratic risk and system risk caused by the macroeconomic change. The study shows that the price of CDS increases as the intensity and the amplitude of the Jump-Diffusion Process increase. Furthermore, the CDS price depends on the initial state and transition intensity of the volatility of the corporate value, which the former can reflect the influence of macroeconomic situation.