Unilateral CVA for CDS in a contagion model with stochastic pre-intensity and interest
Price of a financial derivative with unilateral counterparty credit risk equals to the price of an otherwise risk-free derivative minus a credit value adjustment (CVA) component, which can be seen as a call option on investor's NPV with strike 0. Thus modeling volatility of NPV is the foundation for CVA valuation. This paper assumes that default times of counterparty and reference firm follow a special contagion model with stochastic pre-intensities that allows for explicit formulas for default probabilities. Stochastic interest rate is also incorporated to account for positive correlation between pre-intensity and interest. Survival measure approach is employed to calculate NPV of a risk-free CDS, and semi-analytical solution for CVA is obtained through affine specifications. Numerical analysis shows that contagion has more significant impact on CVA than diffusion of pre-intensities, and the positive correlation between interest and reference firm's pre-intensity has monotonic decreasing impact on CVA.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
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.:
- Fan Yu, 2007. "Correlated Defaults In Intensity-Based Models," Mathematical Finance, Wiley Blackwell, vol. 17(2), pages 155-173.
- P. Collin-Dufresne & R. Goldstein & J. Hugonnier, 2004. "A General Formula for Valuing Defaultable Securities," Econometrica, Econometric Society, vol. 72(5), pages 1377-1407, 09.
- Kwai Leung & Yue Kwok, 2009. "Counterparty Risk for Credit Default Swaps: Markov Chain Interacting Intensities Model with Stochastic Intensity," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 16(3), pages 169-181, September.
- Robert A. Jarrow & Fan Yu, 2008.
"Counterparty Risk and the Pricing of Defaultable Securities,"
World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 20, pages 481-515
World Scientific Publishing Co. Pte. Ltd..
- 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.
- Christophette Blanchet-Scalliet & Fr\'ed\'eric Patras, 2008. "Counterparty risk valuation for CDS," Papers 0807.0309, arXiv.org. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:29:y:2012:i:2:p:471-477. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.