Fwd: Re: CreditDefaultSwap throws RuntimeError

[Jose Aparicio-Navarro]

Was there a reason why we are not forcing the refDate to be before the val date
in the CDS engines?

Regards
Pepe


----- Forwarded message from Jose Aparicio-Navarro <japari@...> -----
    Date: Tue, 29 Sep 2009 12:47:51 +0200
    From: Jose Aparicio-Navarro <japari@...>
Reply-To: Jose Aparicio-Navarro <japari@...>
 Subject: Re: [Quantlib-users] CreditDefaultSwap throws RuntimeError
      To: eckuipers-web@...

Quoting eckuipers-web@...:

>
> hazard_rate_structure=ql.FlatHazardRate(
>     ql.QuoteHandle(ql.SimpleQuote(hazard_rate)), # quote handle
>     ql.ActualActual() # day counter
>     )
>
> issuer=ql.Issuer(
>     ql.RelinkableDefaultProbabilityTermStructureHandle(
>         hazard_rate_structure
>         ), # relinkable handle to default prob term struct
>     recovery_rate # recovery rate
>     )
>
> yield_term_structure=ql.FlatForward(
>     2, # settlement days
>     calendar, # calendar
>     rate, # rate
>     ql.ActualActual() # day counter
>     )
>

The FlatHR is (I assuming what the Py binds are doing) constructing a relative
date curve linked to the instance date with a 0 settlement delay.
The Yield term structure is doing the same with a 2 days settlement delay.

The engine requests DFs and Probabilities on coupon days and default days.

16th June 06 is a thursday, next coupon goes over a weekend, your TS jumps the
weekend, the prob not. The coupon is on the following Tuesday. The the engine is
asking on a past date, is my guess this is the first date this situation takes
place.
I was surprised it crashed on the 15th so I coded it and in C++ it crashes on
the 16th (Friday). It might be your output buffer not being flushed.


Date date(1,January, 2006);
date = TARGET().adjust(date, Following);
Date maturity(20,December, 2014);
Rate spread = 0.05;
Real recoveryRate = 0.4;
Rate hazardRate = 0.2;
Rate yieldRate = 0.03;

Schedule schedCds =
    MakeSchedule().from(date)
                  .to(maturity)
                  .withFrequency(Quarterly)
                  .withConvention(Following)
                  .withTerminationDateConvention(Following)
                  .withCalendar(TARGET())
                  .withRule(DateGeneration::TwentiethIMM)
   ;

CreditDefaultSwap our_cds(Protection::Buyer,
                      1., spread, schedCds,
                      Following,
                      Actual360()
                      );
Handle<DefaultProbabilityTermStructure> probability(
    boost::shared_ptr<DefaultProbabilityTermStructure>(new
        FlatHazardRate(0,  // <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
            TARGET(),
            hazardRate, ActualActual())));

Handle<YieldTermStructure> yield_term_structure(
      boost::shared_ptr<FlatForward>(
              new FlatForward(0, //2,  //<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
                TARGET(), yieldRate,
                ActualActual())));

boost::shared_ptr<CreditDefaultSwap::engine>
    HRengine_tst(boost::shared_ptr<MidPointCdsEngine>
        (new MidPointCdsEngine(probability,
                        recoveryRate, yield_term_structure, true
         )));

our_cds.setPricingEngine(HRengine_tst);

while(date < Date(24, September, 2009)) {
    Settings::instance().evaluationDate() = date;
    cout << date << " , " << our_cds.NPV() << endl;
    date = TARGET().advance(date, 1, Days);
}



Regards
Pepe


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[Luigi Ballabio]

On Tue, 2009-09-29 at 13:38 +0200, Jose Aparicio-Navarro wrote:
> Was there a reason why we are not forcing the refDate to be before the val date
> in the CDS engines?

Before the evaluation date or the default date? If it's the evaluation
date, I wouldn't add a strict requirement as the engine worked for most
dates.  If it's the mid-period default date, we can think about it.  Do
we require it to be after the curve reference, or we adjust it a day or
two so that it falls on the reference date?

Luigi

> ----- Forwarded message from Jose Aparicio-Navarro <japari@...> -----
>     Date: Tue, 29 Sep 2009 12:47:51 +0200
>     From: Jose Aparicio-Navarro <japari@...>
> Reply-To: Jose Aparicio-Navarro <japari@...>
>  Subject: Re: [Quantlib-users] CreditDefaultSwap throws RuntimeError
>       To: eckuipers-web@...
>
> Quoting eckuipers-web@...:
>
> >
> > hazard_rate_structure=ql.FlatHazardRate(
> >     ql.QuoteHandle(ql.SimpleQuote(hazard_rate)), # quote handle
> >     ql.ActualActual() # day counter
> >     )
> >
> > issuer=ql.Issuer(
> >     ql.RelinkableDefaultProbabilityTermStructureHandle(
> >         hazard_rate_structure
> >         ), # relinkable handle to default prob term struct
> >     recovery_rate # recovery rate
> >     )
> >
> > yield_term_structure=ql.FlatForward(
> >     2, # settlement days
> >     calendar, # calendar
> >     rate, # rate
> >     ql.ActualActual() # day counter
> >     )
> >
>
> The FlatHR is (I assuming what the Py binds are doing) constructing a relative
> date curve linked to the instance date with a 0 settlement delay.
> The Yield term structure is doing the same with a 2 days settlement delay.
>
> The engine requests DFs and Probabilities on coupon days and default days.
>
> 16th June 06 is a thursday, next coupon goes over a weekend, your TS jumps the
> weekend, the prob not. The coupon is on the following Tuesday. The the engine is
> asking on a past date, is my guess this is the first date this situation takes
> place.
> I was surprised it crashed on the 15th so I coded it and in C++ it crashes on
> the 16th (Friday). It might be your output buffer not being flushed.
>
>
> Date date(1,January, 2006);
> date = TARGET().adjust(date, Following);
> Date maturity(20,December, 2014);
> Rate spread = 0.05;
> Real recoveryRate = 0.4;
> Rate hazardRate = 0.2;
> Rate yieldRate = 0.03;
>
> Schedule schedCds =
>     MakeSchedule().from(date)
>                   .to(maturity)
>                   .withFrequency(Quarterly)
>                   .withConvention(Following)
>                   .withTerminationDateConvention(Following)
>                   .withCalendar(TARGET())
>                   .withRule(DateGeneration::TwentiethIMM)
>    ;
>
> CreditDefaultSwap our_cds(Protection::Buyer,
>                       1., spread, schedCds,
>                       Following,
>                       Actual360()
>                       );
> Handle<DefaultProbabilityTermStructure> probability(
>     boost::shared_ptr<DefaultProbabilityTermStructure>(new
>         FlatHazardRate(0,  // <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
>             TARGET(),
>             hazardRate, ActualActual())));
>
> Handle<YieldTermStructure> yield_term_structure(
>       boost::shared_ptr<FlatForward>(
>               new FlatForward(0, //2,  //<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
>                 TARGET(), yieldRate,
>                 ActualActual())));
>
> boost::shared_ptr<CreditDefaultSwap::engine>
>     HRengine_tst(boost::shared_ptr<MidPointCdsEngine>
>         (new MidPointCdsEngine(probability,
>                         recoveryRate, yield_term_structure, true
>          )));
>
> our_cds.setPricingEngine(HRengine_tst);
>
> while(date < Date(24, September, 2009)) {
>     Settings::instance().evaluationDate() = date;
>     cout << date << " , " << our_cds.NPV() << endl;
>     date = TARGET().advance(date, 1, Days);
> }
>
>
>
> Regards
> Pepe
>
>
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>
>
>
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[Jose Aparicio-Navarro]

Quoting Luigi Ballabio <luigi.ballabio@...>:

> Before the evaluation date or the default date? If it's the evaluation
> date, I wouldn't add a strict requirement as the engine worked for most
> dates.  If it's the mid-period default date, we can think about it.  Do
> we require it to be after the curve reference, or we adjust it a day or
> two so that it falls on the reference date?
>

Yep, lets make it the TS ref date. Moving this

Date effectiveStartDate =
   (startDate <= today && today <= endDate) ? today : startDate;

into:

Date effectiveStartDate =
    (startDate <= settlementDate && settlementDate <= endDate) ?
        settlementDate : startDate;

works for both cds engines.

There will still be problems if:
 probability_->referenceDate() > discountCurve_->referenceDate()

I havent tested it much though.
Regards
Pepe


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[Luigi Ballabio]

On Mon, 2009-10-05 at 11:31 +0200, Jose Aparicio-Navarro wrote:

> Quoting Luigi Ballabio <luigi.ballabio@...>:
> Yep, lets make it the TS ref date. Moving this
>
> Date effectiveStartDate =
>    (startDate <= today && today <= endDate) ? today : startDate;
>
> into:
>
> Date effectiveStartDate =
>     (startDate <= settlementDate && settlementDate <= endDate) ?
>         settlementDate : startDate;
>
> works for both cds engines.

Except I'd leave the start date alone and correct the default date
instead, if possible. No?

Luigi


--

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express it.
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[Jose Aparicio-Navarro]

Quoting Luigi Ballabio <luigi.ballabio@...>:

> On Mon, 2009-10-05 at 11:31 +0200, Jose Aparicio-Navarro wrote:
> > Quoting Luigi Ballabio <luigi.ballabio@...>:
> > Yep, lets make it the TS ref date. Moving this
> >
> > Date effectiveStartDate =
> >    (startDate <= today && today <= endDate) ? today : startDate;
> >
> > into:
> >
> > Date effectiveStartDate =
> >     (startDate <= settlementDate && settlementDate <= endDate) ?
> >         settlementDate : startDate;
> >
> > works for both cds engines.
>
> Except I'd leave the start date alone and correct the default date
> instead, if possible. No?
>
> Luigi
>

Right, not to mix things. But theres a potential problem with

Probability P = probability_->defaultProbability(
                    effectiveStartDate, ///<<<<<
                    endDate);
if "effectiveStartDate" lies before the probability curve reference date (I am
thinking: startAccrual < refProb < refTS < endAccrual). Now negative times come
from the probability TS instead.
We can add :

defaultEffectiveStartPeriod =
    effectiveStartDate < refProb ? refProb : effectiveStartDate;

Regards
Pepe

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