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Pricing Credit Default Swap Subject to Counterparty Risk and Collateralization

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  • White, Alan

Abstract

This article presents a new model for valuing a credit default swap (CDS) contract that is affected by multiple credit risks of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset pricing. In fact, correlated default risk is one of the most pervasive threats in financial markets. We also show that a fully collateralized CDS is not equivalent to a risk-free one. In other words, full collateralization cannot eliminate counterparty risk completely in the CDS market.

Suggested Citation

  • White, Alan, 2018. "Pricing Credit Default Swap Subject to Counterparty Risk and Collateralization," MPRA Paper 85331, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:85331
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    References listed on IDEAS

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    Cited by:

    1. Misha Beek & Michel Mandjes & Peter Spreij & Erik Winands, 2020. "Regime switching affine processes with applications to finance," Finance and Stochastics, Springer, vol. 24(2), pages 309-333, April.

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    More about this item

    Keywords

    valuation model; credit risk modeling; collateralization; correlation; CDS.;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D46 - Microeconomics - - Market Structure, Pricing, and Design - - - Value Theory
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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