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Counterparty Risk and the Pricing of Defaultable Securities

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Author Info
Robert A. Jarrow

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Abstract

Motivated by recent financial crises in East Asia and the United States where the downfall of a small number of firms had an economy-wide impact, this paper generalizes existing reduced-form models to include default intensities dependent on the default of a counterparty. In this model, firms have correlated defaults due not only to an exposure to common risk factors, but also to firm-specific risks that are termed "counterparty risks." Numerical examples illustrate the effect of counterparty risk on the pricing of defaultable bonds and credit derivatives such as default swaps. Copyright The American Finance Association 2001.

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Publisher Info
Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 56 (2001)
Issue (Month): 5 (October)
Pages: 1765-1799
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Handle: RePEc:bla:jfinan:v:56:y:2001:i:5:p:1765-1799

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  1. Didier Rulli\`ere & Diana Dorobantu, 2009. "An extension of Davis and Lo's contagion model," Quantitative Finance Papers 0904.1653, arXiv.org. [Downloadable!]
  2. Kwai Leung & Yue Kwok, 2009. "Counterparty Risk for Credit Default Swaps: Markov Chain Interacting Intensities Model with Stochastic Intensity," Asia-Pacific Financial Markets, Springer, vol. 16(3), pages 169-181, September. [Downloadable!] (restricted)
  3. I. Onur Filiz & Xin Guo & Jason Morton & Bernd Sturmfels, 2008. "Graphical models for correlated defaults," Quantitative Finance Papers 0809.1393, arXiv.org. [Downloadable!]
  4. Sanjiv Das & Darrell Duffie & Nikunj Kapadia & Leandro Saita, 2006. "Common Failings: How Corporate Defaults are Correlated," NBER Working Papers 11961, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Linda Allen & Anthony Saunders, 2004. "Incorporating Systemic Influences Into Risk Measurements: A Survey of the Literature," Journal of Financial Services Research, Springer, vol. 26(2), pages 161-191, October. [Downloadable!] (restricted)
  6. Holger Kraft & Mogens Steffensen, 2006. "Bankruptcy, Counterparty Risk, and Contagion," FRU Working Papers 2006/03, University of Copenhagen. Department of Economics. Finance Research Unit. [Downloadable!]
  7. Abel Elizalde, 2006. "Credit Risk Models I: Default Correlation In Intensity Models," Working Papers wp2006_0605, CEMFI. [Downloadable!]
  8. Francis A. Longstaff & Brett Myers, 2009. "Valuing Toxic Assets: An Analysis of CDO Equity," NBER Working Papers 14871, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. K. Giesecke, . "Credit Risk Modeling and Valuation: an Introduction," Sonderforschungsbereich 373 2002-54, Humboldt Universitaet Berlin.
  10. Jose Giancarlo Gasha & Carlos I. Medeiros & Marcos Souto & Christian Capuano & Andre Santos & Jorge A. Chan-Lau, 2009. "Recent Advances in Credit Risk Modeling," IMF Working Papers 09/162, International Monetary Fund. [Downloadable!]
  11. Hayette Gatfaoui, 2004. "From Fault Tree to Credit Risk Assessment: A Case Study," EERI Research Paper Series EERI_RP_2004_05, Economics and Econometrics Research Institute (EERI). [Downloadable!]
  12. Diana Barro & Antonella Basso, 2008. "A network of business relations to model counterparty risk," Working Papers 171, Department of Applied Mathematics, University of Venice. [Downloadable!]
  13. Eugene N. White, 2007. "The Crash of 1882, Counterparty Risk, and the Bailout of the Paris Bourse," NBER Working Papers 12933, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Hayette GATFAOUI, 2005. "From Fault Tree to Credit Risk Assessment: A Case Study," Econometrics 0509002, EconWPA. [Downloadable!]
  15. Paolo Dai Pra & Wolfgang J. Runggaldier & Elena Sartori & Marco Tolotti, 2007. "Large portfolio losses: A dynamic contagion model," Quantitative Finance Papers 0704.1348, arXiv.org, revised Mar 2009. [Downloadable!]
  16. Rosenthal, Dale W.R., 2008. "Data Delays, Index Deletions, Prepayments, and Defaults," MPRA Paper 8556, University Library of Munich, Germany. [Downloadable!]
  17. Ivan Alves, 2005. "Sectoral fragility: factors and dynamics," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 450-80 Bank for International Settlements. [Downloadable!]
  18. Li Chen & Damir Filipovic, 2003. "Credit Derivatives in an Affine Framework," Finance 0307002, EconWPA. [Downloadable!]
  19. Antonella Basso & Riccardo Gusso, 2008. "A credit contagion model for the dynamics of the rating transitions in a SME bank loan portfolio," Working Papers 162, Department of Applied Mathematics, University of Venice. [Downloadable!]
  20. Li Chen & Damir Filipovic, 2003. "Pricing Credit Default Swaps Under Default Correlations and Counterparty Risk," Finance 0303009, EconWPA. [Downloadable!]
  21. Didier Cossin & Daniel Aunon-Nerin & Fernando Gonzales, 2003. "A framework for collateral risk control determination," Working Paper Series 209, European Central Bank. [Downloadable!]
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