Advanced Search
MyIDEAS: Login to save this article or follow this journal

Unilateral CVA for CDS in a contagion model with stochastic pre-intensity and interest

Contents:

Author Info

  • Bao, Qunfang
  • Chen, Si
  • Li, Shenghong
Registered author(s):

    Abstract

    Price of a financial derivative with unilateral counterparty credit risk equals to the price of an otherwise risk-free derivative minus a credit value adjustment (CVA) component, which can be seen as a call option on investor's NPV with strike 0. Thus modeling volatility of NPV is the foundation for CVA valuation. This paper assumes that default times of counterparty and reference firm follow a special contagion model with stochastic pre-intensities that allows for explicit formulas for default probabilities. Stochastic interest rate is also incorporated to account for positive correlation between pre-intensity and interest. Survival measure approach is employed to calculate NPV of a risk-free CDS, and semi-analytical solution for CVA is obtained through affine specifications. Numerical analysis shows that contagion has more significant impact on CVA than diffusion of pre-intensities, and the positive correlation between interest and reference firm's pre-intensity has monotonic decreasing impact on CVA.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.sciencedirect.com/science/article/pii/S0264999311002793
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 29 (2012)
    Issue (Month): 2 ()
    Pages: 471-477

    as in new window
    Handle: RePEc:eee:ecmode:v:29:y:2012:i:2:p:471-477

    Contact details of provider:
    Web page: http://www.elsevier.com/locate/inca/30411

    Related research

    Keywords: Credit value adjustment; Contagion model; Stochastic pre-intensities and interest; Survival measure; Affine specification;

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. P. Collin-Dufresne & R. Goldstein & J. Hugonnier, 2004. "A General Formula for Valuing Defaultable Securities," Econometrica, Econometric Society, Econometric Society, vol. 72(5), pages 1377-1407, 09.
    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, Springer, vol. 16(3), pages 169-181, September.
    3. Christophette Blanchet-Scalliet & Fr\'ed\'eric Patras, 2008. "Counterparty risk valuation for CDS," Papers 0807.0309, arXiv.org.
    4. Robert A. Jarrow, 2001. "Counterparty Risk and the Pricing of Defaultable Securities," Journal of Finance, American Finance Association, American Finance Association, vol. 56(5), pages 1765-1799, October.
    5. Fan Yu, 2007. "Correlated Defaults In Intensity-Based Models," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 17(2), pages 155-173.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:29:y:2012:i:2:p:471-477. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.