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Unilateral Counterparty Risk Valuation for CDS Under a Regime Switching Interacting Intensities Model

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  • Yinghui Dong

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  • Xue Liang
  • Guojing Wang
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    Abstract

    We consider the credit valuation adjustment (CVA) of credit default swap under an interacting intensities model. The default intensities of the protection seller and the reference entity are both influenced by an external shock event. The arrival of the shock event is a regime switching Poisson process, which is a special case of Cox processes. We give the explicit formula for the CVA of the credit and examine the regime switching effect on the premium and the CVA. Copyright Springer Science+Business Media, LLC. 2012

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    File URL: http://hdl.handle.net/10.1007/s10690-012-9155-y
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    Bibliographic Info

    Article provided by Springer in its journal Asia-Pacific Financial Markets.

    Volume (Year): 19 (2012)
    Issue (Month): 4 (November)
    Pages: 391-415

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    Handle: RePEc:kap:apfinm:v:19:y:2012:i:4:p:391-415

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    Web page: http://springerlink.metapress.com/link.asp?id=102851

    Related research

    Keywords: Credit default swaps; Counterparty risk; Credit valuation adjustment; Interacting intensity; Regime switching;

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    1. 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.
    2. Dirk Hackbarth & Junjian Miao & Erwan Morellec, 2005. "Capital Structure, Credit Risk, and Macroeconomic Conditions," Boston University - Department of Economics - Macroeconomics Working Papers Series WP2005-005, Boston University - Department of Economics.
    3. Davies, Andrew, 2008. "Credit spread determinants: An 85 year perspective," Journal of Financial Markets, Elsevier, vol. 11(2), pages 180-197, May.
    4. Robert J. Elliott & Leunglung Chan & Tak Kuen Siu, 2005. "Option pricing and Esscher transform under regime switching," Annals of Finance, Springer, vol. 1(4), pages 423-432, October.
    5. Shaked, Moshe & George Shanthikumar, J., 1987. "The multivariate hazard construction," Stochastic Processes and their Applications, Elsevier, vol. 24(2), pages 241-258, May.
    6. Robert A. Jarrow, 2001. "Counterparty Risk and the Pricing of Defaultable Securities," Journal of Finance, American Finance Association, vol. 56(5), pages 1765-1799, October.
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