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Unilateral Counterparty Risk Valuation for CDS Under a Regime Switching Interacting Intensities Model


  • Yinghui Dong


  • Xue Liang
  • Guojing Wang


We consider the credit valuation adjustment (CVA) of credit default swap under an interacting intensities model. The default intensities of the protection seller and the reference entity are both influenced by an external shock event. The arrival of the shock event is a regime switching Poisson process, which is a special case of Cox processes. We give the explicit formula for the CVA of the credit and examine the regime switching effect on the premium and the CVA. Copyright Springer Science+Business Media, LLC. 2012

Suggested Citation

  • Yinghui Dong & Xue Liang & Guojing Wang, 2012. "Unilateral Counterparty Risk Valuation for CDS Under a Regime Switching Interacting Intensities Model," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 19(4), pages 391-415, November.
  • Handle: RePEc:kap:apfinm:v:19:y:2012:i:4:p:391-415 DOI: 10.1007/s10690-012-9155-y

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    References listed on IDEAS

    1. Robert J. Elliott & Leunglung Chan & Tak Kuen Siu, 2005. "Option pricing and Esscher transform under regime switching," Annals of Finance, Springer, vol. 1(4), pages 423-432, October.
    2. Hackbarth, Dirk & Miao, Jianjun & Morellec, Erwan, 2006. "Capital structure, credit risk, and macroeconomic conditions," Journal of Financial Economics, Elsevier, vol. 82(3), pages 519-550, December.
    3. Shaked, Moshe & George Shanthikumar, J., 1987. "The multivariate hazard construction," Stochastic Processes and their Applications, Elsevier, vol. 24(2), pages 241-258, May.
    4. 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.
    5. 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..
    6. Davies, Andrew, 2008. "Credit spread determinants: An 85 year perspective," Journal of Financial Markets, Elsevier, vol. 11(2), pages 180-197, May.
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