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Pricing Credit Default Swaps Under Default Correlations and Counterparty Risk

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Author Info
Li Chen (Princeton University)
Damir Filipovic (Princeton University)

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Abstract

In this paper, we develop a generalized affine model to characterize correlated credit risk of multi-firms. When valuing credit derivatives, this new approach allows to incorporate correlative market and credit risk, interdependent default risk structure and counterparty risk into consideration. We have demonstrated our affine model not only combines the existing structural models and intensity based models, but also produces explicit formulas for the prices of credit default swaps and other credit derivatives.

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File URL: http://129.3.20.41/eps/fin/papers/0303/0303009.pdf
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Publisher Info
Paper provided by EconWPA in its series Finance with number 0303009.

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Length: 22 pages
Date of creation: 31 Mar 2003
Date of revision:
Handle: RePEc:wpa:wuwpfi:0303009

Note: Type of Document - pdf; prepared on IBM PC - PC-TEX/UNIX Sparc TeX; to print on HP/PostScript/Franciscan monk; pages: 22 ; figures: none. We never published this piece and now we would like to reduce our mailing and xerox cost by posting it.
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Related research
Keywords: affine models; credit default swaps; credit risk; counterparty risk;

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Find related papers by JEL classification:
C39 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Other

This paper has been announced in the following NEP Reports:

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.:
  1. Li Chen & Damir Filipovic, 2003. "Modeling Credit Risk by Affine Processes," Finance 0303006, EconWPA. [Downloadable!]
  2. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
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  3. 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. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Li Chen & Damir Filipovic, 2003. "A Simple Model for Credit Migration and Spread Curves," Finance 0305003, EconWPA. [Downloadable!]
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