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Valuation And Hedging Of Cds Counterparty Exposure In A Markov Copula Model

Author

Listed:
  • T. R. BIELECKI

    (Department of Applied Mathematics, Illinois Institute of Technology, 10 W 32nd Street, Chicago, IL 60616, USA)

  • S. CRÉPEY

    (Université d'Evry, Laboratoire d'Analyse & Probabilitiés, 23 Boulevard de France, 91037 Evry, France)

  • M. JEANBLANC

    (Université d'Evry, Laboratoire d'Analyse & Probabilitiés, 23 Boulevard de France, 91037 Evry, France)

  • B. ZARGARI

    (Université d'Evry, Laboratoire d'Analyse & Probabilitiés, 23 Boulevard de France, 91037 Evry, France;
    Sharif University of Technology, Iran)

Abstract

A Markov model is constructed for studying the counterparty risk in a CDS contract. The "wrong-way risk" in this model is accounted for by the possibility of the common default of the reference name and of the counterparty. A dynamic copula property as well as affine model specifications make pricing and calibration very efficient. We also consider the issue of dynamically hedging the CVA with a rolling CDS written on the counterparty. Numerical results are presented to show the adequacy of the behavior of CVA in the model with stylized features.

Suggested Citation

  • T. R. Bielecki & S. Crépey & M. Jeanblanc & B. Zargari, 2012. "Valuation And Hedging Of Cds Counterparty Exposure In A Markov Copula Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 15(01), pages 1-39.
    • Handle: RePEc:wsi:ijtafx:v:15:y:2012:i:01:n:s0219024911006498
    DOI: 10.1142/S0219024911006498
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    Citations

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    Cited by:

    1. Tomasz R. Bielecki & Marek Rutkowski, 2014. "Valuation and Hedging of Contracts with Funding Costs and Collateralization," Papers 1405.4079, arXiv.org, revised Dec 2014.
    2. Maxim Bichuch & Agostino Capponi & Stephan Sturm, 2020. "Robust XVA," Mathematical Finance, Wiley Blackwell, vol. 30(3), pages 738-781, July.
    3. Tomasz R. Bielecki & Areski Cousin & Stéphane Crépey & Alexander Herbertsson, 2014. "Dynamic Hedging of Portfolio Credit Risk in a Markov Copula Model," Journal of Optimization Theory and Applications, Springer, vol. 161(1), pages 90-102, April.
    4. Gapeev, Pavel V. & Jeanblanc, Monique, 2021. "First-to-default and second-to-default options in models with various information flows," LSE Research Online Documents on Economics 110750, London School of Economics and Political Science, LSE Library.
    5. Bielecki, T.R. & Cousin, A. & Crépey, S. & Herbertsson, Alexander, 2012. "A Markov Copula Model of Portfolio Credit Risk with Stochastic Intensities and Random Recoveries," Working Papers in Economics 545, University of Gothenburg, Department of Economics.
    6. Matthias Scherer & Thorsten Schulz, 2016. "Extremal Dependence For Bilateral Credit Valuation Adjustments," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 19(07), pages 1-21, November.
    7. Pavel V. Gapeev & Monique Jeanblanc, 2020. "Credit Default Swaps In Two-Dimensional Models With Various Informations Flows," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 23(02), pages 1-28, March.

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