Pricing Credit Default Swaps under the scaled constant elasticity of variance model

This paper explores the capabilities of the Constant Elasticity of Variance model driven by scaled Brownian motion (sCEV) to address default-related financial problems, particularly the pricing of Credit Default Swaps (CDS). The first-passage time over zero-state (default) probability is obtained, linking the related Fokker-Planck equation to a well-known result for the square Bessel processes. After computing the present value of the protection payment due to a default event, a CDS contract is valued. The increase in both the probability of default and the coupon rates under scaled diffusion compared to the standard Brownian can improve the lower empirical performance of the standard Constant Elasticity of Variance model, leading to a more realistic model for credit events.