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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://128.118.178.162/eps/fin/papers/0303/0303009.pdf
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Bibliographic 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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References

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  1. Robert A. Jarrow, 2009. "Credit Risk Models," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 37-68, November.
  2. Li Chen & Damir Filipovic, 2003. "Modeling Credit Risk by Affine Processes," Finance 0303006, EconWPA.
  3. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
  4. 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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Cited by:
  1. Li Chen & Damir Filipovic, 2003. "A Simple Model for Credit Migration and Spread Curves," Finance 0305003, EconWPA.
  2. Alexander Lipton & Ioana Savescu, 2012. "Pricing credit default swaps with bilateral value adjustments," Papers 1207.6049, arXiv.org.

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