S. Asmussen, D. Madan, M. Pistorius: Pricing Equity Default Swaps under an approximation to the CGMY Levy Model

February 19, 2008

The Wiener-Hopf factorization is obtained in closed form for a phase type approximation to the CGMY Levy process. This allows, for the approximation, exact computation of first passage times to barrier levels via La place transform inversion. Calibration of the CGMY model to market option prices defines the risk neutral process for which we infer the first passage times of stock prices to 30% of the price level at contract initiation.