Effects on Hedging Errors of First-to-Default Swap from Parameter Estimation Errors

Abstract

In this paper, we consider effects on hedging errors of a first-to-default swap (FTDS) under a hazard model with deterministic intensities from parameter estimation errors. Here parameter means default intensities of FTDS reference companies. As our mathematical model of FTDS and a credit default swap (CDS) market, we mainly follow Bielecki et al. [1] and [2] and use copula functions to represent the correlation of default times. We give some analytical and numerical results of hedging errors from parameter estimation errors.