Enemies or Allies: Pricing counterparty credit risk for synthetic CDO tranches
AbstractThis research aims to construct a model for pricing counterparty credit risk (CCR) for synthetic collateralized debt obligation (CDO) tranches by considering the relationship between the counterparty and the credit port- folio. A stochastic intensity model is adopted to describe the default event of the counterparty, and a two-factor Gaussian copula model is applied to account for the relationship between the counterparty and underlying credit portfolio. By analyzing the data of CDX NA IG index tranches, we �nd that the relationship has a signi�cant in uence on the credit value adjust- ment (CVA) for index tranches and, hence, that it should not be ignored when a contract is initiated. In addition, we discover that the in uence has opposite e�ects and asymmetrical magnitude with respect to the protection buyers and protection sellers.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 52371.
Date of creation: 2013
Date of revision:
counterparty credit risk; synthetic CDO tranches; CDX NA IG index tranches; Gaussian copula model; credit value adjustment;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-12-29 (All new papers)
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.:
- 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.
- Damiano Brigo & Kyriakos Chourdakis, 2009. "Counterparty Risk For Credit Default Swaps: Impact Of Spread Volatility And Default Correlation," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., World Scientific Publishing Co. Pte. Ltd., vol. 12(07), pages 1007-1026.
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