Valuing credit default swaps in uncertain environments

Abstract

The credit default swap is an important instrument in the financial market. At present, the valuation of credit default swaps is based on probability theory. In this paper, we propose a pricing formula for the credit default swap of corporate bonds from the perspective of a non-probabilistic method derived from uncertainty theory. In particular, we relate the corporate stock price to its solvency and use this relationship to develop the pricing formula. In addition, we derive two valuation models for CDS under two classic uncertain stock models. The valuation models are then compared based on their properties.